SKS Microfinance: a good Q4, but is it enough in the new paradigm?
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SKS Microfinance Ltd is no longer the only fish in the pond. With the Reserve Bank of India (RBI) granting licences to 10 small finance banks and two of them—Equitas Holdings Ltd and Ujjivan Financial Services Ltd—listed, or about to list, investors have a wider choice for a microfinance play.
So far, the company has done well after recovering from the microfinance crisis in Andhra Pradesh. In the March quarter, for instance, its assets under management (AUM) grew 84% from a year ago to Rs.7,677 crore. The increase in AUM was driven by a strong increase in the number of borrowers—up 26%—as well as an increase in the average ticket size (45%). Long-term loans now constitute close to 30%.
The increase in AUM was also driven by loan disbursements, which rose 63% to Rs.4,066 crore. However, the growth in the volume of loans disbursed slowed to 29% from a year ago, compared with 49% in the December quarter, and remains a key yardstick for investors to track.
SKS’s non-interest income growth was 42% and the non-microfinance business now contributes close to 10% of net profit. Its cost-to-income ratio has come down to 47.5% from around 75% two financial years ago. Asset quality is good with bad loans ratio stable at 0.1%. Its return on equity is 25% and net interest margin is 9.6%.
With microfinance being a sunrise sector still, there appears to be no immediate pressure on SKS’s loan growth or margins. But is that enough?
Competition is only set to intensify with small finance banks. SKS has responded by cutting rates to 19.75%, the lowest in the microlending industry, which it believes will mitigate political risk. It now also has a bigger recourse to other sources of funding such as MUDRA Bank, where it has refinanced Rs.100 crore at 10%.
That said, over the longer term, the small finance banks are likely to have some advantages when it comes to funding costs and scalability of funding. In the short term, though, these new banks will suffer in terms of profitability as they go through a transition phase.
It is in that period SKS scores, with analysts projecting earnings per share growth of as much as 55% through financial year 2018.
On the flip side, these near-term earnings growth seems to be priced in. SKS shares trade at close to 4.4 times their expected book value for the current fiscal, at a premium to many full-fledged private sector banks, leave alone Ujjivan or Equitas.