I had written about an excellent opportunity to invest in SKS Microfinance about 7 months ago. Following is the link to that report:
The SKS Microfinance stock had just undergone a decent correction then and was available for around Rs.425/-. It's been three quarterly results since then and hence it's time to check on the company's financial progress.
One look at the following charts which show the progress made by SKS Microfinance on a T-T-M basis and it will be very clear that the company has managed to continue growing at the same pace that it was a few quarters ago.
Despite the increasing base of comparison, SKS Microfinance has managed to accelerate it's pace of growth during the four quarters of FY'16. The company had reported about 47% Y-o-Y growth in Total Income in FY'15, which in itself was very good. But the company has managed to improve that to grow it's Total Income by about 64% in FY'16. I think this is an excellent achievement by the company. The T-T-M Total Income of SKS Microfinance now stands at over Rs.1300 crores and even it's T-T-M Net Profit has just crossed the Rs.300 crores mark. The company has managed to keep a good tab on it's Interest Costs as well as the Quality of it's Loan Assets. The Interest Cost for the company was under 37% of it's Total Income for FY'16. It has consistently managed to keep this figure under 40% for the last 3 years and this too is an excellent achievement.
SKS Microfinance Ltd. is in the process of changing it's name to Bharat Financial Inclusion Ltd. I think that the company is taking steps in order to become eligible for a Small Bank License. It is widely expected that the recently awarded Small Bank Licencees will be at an advantage to normal Microfinance companies like SKS in terms of cost of borrowing and also some rules which will be different for the two categories. Many of the Small Bank License winners are now in the process of implementing their new business plans. It might take them about another year or two before those advantages start playing out in their favour and that could be the time when SKS Microfinance might face much stiffer competition from these Small Banks. Hence I think that SKS is aligning itself as per rules for Small Banks and must be hoping to win a license during the next round.
Valuations: The SKS Microfinance stock has rallied from levels of about Rs.425 seven months ago, to about Rs.670 level now, which a 60% rally in a short span. The T-T-M EPS of the company currently stands at little under Rs.24/-. That means the stock still trades at a not-so-expensive valuations of about 28 times, despite the strong rally in it's stock in the recent months. I think this stock can easily hold this P/E ratio over the coming quarters, even though the conservative analyst in me is expecting the company's Y-o-Y growth rate to come down to more reasonable levels of 30-40% over the next 4-6 quarters from the very high levels of 60+% currently. Given the strong growth visibility over the next few quarters with good certainty, I think this stock will continue to move in line with the company's Net Profit growth percentages. I will be worried only when I see signs of the company facing stiffer competition from the newly formed Small Banks, which I am expecting sometime in FY'18.
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