SKS Microfinance Ltd. - Stock Idea performance Update.

I had written about an excellent opportunity to invest in SKS Microfinance about 7 months ago. Following is the link to that report:

SKS Microfinance - opportunity to invest at attractive valuation!!

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.

SKS Microfinance - opportunity to invest at attractive valuation!!

I had written my first report on SKS Microfinance Ltd about 7 months back. Here is the link to that report: http://stockslogic.blogspot.in/2015/03/sks-microfinance-limited-successful.html

The company has continued it's smart recovery in business performance. SKS Microfinance Ltd's T-T-M Total Income has now increased to Rs.917 crores by June'15, which is 55% higher Y-o-Y. The company's T-T-M Net Profit has reached Rs.199.50 crores, which is 74% higher Y-o-Y, despite the fact that the company has paid an Income Tax of Rs.24 crores during the last 2 quarters after it's Tax adjustment eligibility against past losses seems to be getting over. The company's PBT figure was higher by over 95% Y-o-Y. Thanks to the Tax being paid from the recent 2 quarters, the Y-o-Y growth for Net Profit might seem lower for the next 2-3 quarters, than the numbers reported earlier. After that things will normalise. Have a look at the charts below:

With every passing quarter, SKS Microfinance is spreading it's reach at a steady pace. Focus is clearly on expanding it's business outside of Andhra Pradesh. In order to maintain tight check on quality of it's loan portfolio, the company is strictly disbursing loans only for Income-generating activities. Odisha & Karnataka continue to be the Top-2 states contributing to SKS's business, with Maharashtra, Bihar & West Bengal next in line. The company has a presence in total of 16 states with no state, other than Odisha or Karnataka, contributing to more than 15% to it's Loan portfolio. SKS Microfinance has seen a 25% Y-o-Y increase in it's Average Loan Size in Q1-FY'16 to over Rs.13,300/-. This is extremely positive from the margin point of view. With increasing business scale, the Cost-to-Income ratio is showing a marked improvement with every passing quarter. The Average Quarterly Disbursement, which was around Rs.1200 crores a year ago, has jumped to about Rs.2400 crores over the last 2 quarters.

Coming to stock performance, it had hit a multi-year high of around Rs.580/- in the last week of July'15. Since then the stock of SKS Microfinance Ltd has seen it's first major correction. The stock has corrected to levels of about Rs.380 by the last week of September'15.

 This correction has given an opportunity to long term investors who were looking to invest in SKS Microfinance at decent valuations. At the current price of around Rs.425/-, SKS Microfinance Ltd trades at a P/E ratio of about 26-27 times it's T-T-M EPS. Considering the company's current growth momentum and the potential of future growth continuity, these valuations aren't expensive. Infact it can be termed as attractive. The company's Total Income could very well double from current level of little over Rs.900 crores to around Rs.1800 crores in the next 4 to 6 quarters. The Net Profit may not grow at the same pace as Total Income, but still will post very good growth to ensure that current valuations to look cheap in the long term.

Happy Investing !!!

SKS Microfinance Limited - A Successful Turnaround story.

SKS Microfinance Limited has been the pioneer of the Microfinance industry in India. Microfinance basically means Small Loans. This business is mainly operated in rural or semi-urban areas, where the average Loan Amount is less than Rs.30,000/- and the average Repayment Duration is generally a few months only. The Microfinance business grew in popularity mainly as a much better alternative to local money lenders, who used to charge exhorbitant interest rates & used muscle power during recovery of loans, if not paid on time. SKS Microfinance had initially focused it's operations only in the state of Andhra Pradesh (AP) and expanded to other states only after reaching a business substantial size. The company grew by leaps & bounds until the year 2011, when suddenly the entire Microfinance industry faced regulatory ire from multiple sources. The main trouble source was action by the State Govt of AP. Probably the money lenders of the state, who were rapidly losing business to SKS, grouped together and used their political clout to clamp down on SKS's operations.

There was an upheaval in SKS's operations with loads of uncertainties surrounding it's survival. Borrowers suddenly stopped repaying loans, the company couldn't recover it's dues, the company's Capital sources also dried up, and then there were quarrels within the company's management. The Institutional Investors of SKS Microfinance finally took control of the company's management. They sought clarity from RBI about regulations towards the Microfinance industry. Then they reconfigured the company's management & operations to comply as per RBI's regulations. While restarting the business, SKS had to write-off most of it's Loan Book Receivables from the state of AP. All these things were completed by the September'2012 quarter. And from December'2012 quarter SKS started reporting Net Profit again, though on a very small scale of operations, compared to what it was 2 years ago.

Quarterly Numbers

Over the last 2 years, SKS Microfinance has grown it's operations at a pretty good pace. The company is back to over Rs.200 crores in Quarterly Total Income. All this growth is coming from SKS's operations outside the state of AP. SKS is making sure that a single state does not contribute more than 15% to 20% of the company's business at any given point. As other measures to limit the credit risk, SKS is keeping a close tab on the quality of assets contributed by each of it's branches. As soon as the percentage of Bad Loans from a particular branch goes above a certain level, the company immediately cuts incremental funding to that branch until the loan quality is back to normal. The borrowers of SKS Microfinance mainly comprise of farmers who need money to buy Livestock or cattle, or Ladies & Small businessmen who need money for their Tailoring operations or small Kirana stores. In short, the company focuses on giving loans to people who need that money for generating Income. This way there is a better chance of that borrower returning the money in the stipulated time period. 

SKS Microfinance has already reached a scale where it is disbursing loans amounting to about Rs.1200 to 1500 crores each quarter. The company securitises part of it's receivables regularly to improve it's Capital Adequacy Ratio as well as De-risk it's Loan Book. Since the quality of it's Loan assets is very good, the company is not facing any difficulty in securitising it. As per recent updates, SKS Microfinance has already securitised over Rs.1000 crores of it's Loan assets in the current fiscal.

Valuations: As you can see, SKS's stock was around the Rs.100/- mark in July'2013. From there the stock has rallied strongly over the last 20 months to reach a level of around Rs.450/-. As of December'2014, SKS's trailing-twelve-months EPS stands at close to Rs.14/-. That means the stock currently trades at over 32 times it's trailing EPS. Since SKS Microfinance can continue to grow at over 30% over the next 2 years, this valuation cannot be termed as expensive. With over 50% of India's population living in rural areas, there is unlimited scope for growth for all players working in the MicroFinance & Rural Loans space. The Govt of India too is trying to ensure that traditional banking services reach the masses living in the Rural areas and the Jan Dhan Yojana is one step in that direction. With more & more farmers getting access to formal modes of finance, the exploitation by the local money lenders will reduce & we will see improvement in life for people living in villages. Hopefully things will be a lot better on this front in the next 5 years. So I just hope that companies like SKS Microfinance continue to grow at a measured pace & help improve life in rural areas, without compromising too much on the quality of assets.

Happy Investing!!!