Hyderabad/Mumbai: Shares of SKS Microfinance Ltd tumbled on Monday to a new record low, taking its two-day decline to almost 35%, after a fourth quarter (Q4) net loss of some Rs 70 crore at India’s largest and only listed microfinance institution (MFI) spooked investors concerned about deeper malaise ahead as bad loans pile up in its home state of Andhra Pradesh.
Hyderabad-based SKS said it would welcome a regulatory probe into the fall, as the stock dropped Rs 60.50, or 18.26%, to Rs 270.80 at close of trading on the Bombay Stock Exchange (BSE)—the lowest level since it started trading on 16 August. The benchmark Sensex edged up 10.15 points, or 0.05%, at 18,528.96. On Friday, SKS had fallen 19.8% to Rs 331.30.
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SKS reported Q4 and full-year earnings after the market’s close on Friday, revealing numbers that exacerbated investor worries about the fallout of restrictions imposed on microlenders in Andhra Pradesh, India’s biggest market for loans to low-income earners such as vegetable vendors, tea stall owners, weavers and potters.
A robust first half helped it post a full-year net profit of Rs 111.6 crore, still a decline from Rs 173.9 crore in the previous year.
Even before the earnings were declared, investors on Friday pummelled the stock after securities house JPMorgan Chase and Co. released a report predicting a Rs 700 crore loss for the MFI in the fiscal to next 31 March, and reducing its share price target to Rs 200 from Rs 550 because of its exposure to Andhra Pradesh, which makes up more than a quarter of the loans at India’s Rs 22,500 crore microfinance industry.
“After the fall on Friday, investors are nervous about SKS,” said Shadab Rizvi, a Mumbai-based analyst at Darashaw and Co. Pvt. Ltd, a broking and investment banking house. “People still don’t have a clue on what is the right valuation for SKS.”
SKS, founded as a non-profit organization in 1997 by chairman Vikram Akula, raised the equivalent of $358 million (around Rs 1,600 crore today) from an initial public offering (IPO) of shares in August 2010 that was oversubscribed around 14 times. The stock has now lost 82% from its peak level of Rs 1,490.70 in September and almost 73% from its IPO offer price of Rs 985.
“The underlying problem with the asset is getting factored in now,” said Anurag Agrawal, vice-president (investment banking) at social sector advisory firm Intellecap. “The stock is likely to stabilize at Rs 250 to Rs 300 levels.”
“Given SKS’s net worth, diversified portfolio and market leadership, it can weather Rs 700 to Rs 800 crore provisioning,” he added. “However, in next two quarters, there will be negative news which the stock is factoring in.”
SKS has a networth of Rs 1,781 crore, cash and balances of Rs 558 crore and capital adequacy, expressed as a ratio of capital to risk-weighted assets, of 45%, the company said on Friday in its earnings statement.
Friday’s decline in the SKS share price, on a 10-fold surge in trading volume, is being investigated by the stock exchanges and market regulator Securities and Exchange Board of India (Sebi) for possible breach of insider trading norms or the involvement of a bear cartel, PTI reported on Sunday.
“The company wishes to reiterate that it has not heard anything from Sebi or the exchanges in this matter,” an SKS spokesman said on Monday. He noted the release of an analyst report and news bulletins on it ahead of SKS board meeting on Friday; the company had been unable to respond to the report ahead of its earnings announcement.
“SKS Microfinance Ltd would welcome any inquiry by the regulator to investigate the circumstances leading to the fall in the share price,” the spokesperson added in an emailed statement.
The MFI, accused by critics of diluting its social mission of empowering the poor after the IPO that was seen to put shareholders’ interests first, has been in the news for all the wrong reasons since October.
First came an internal feud between Akula and chief executive officer Suresh Gurumani, who was sacked by the board. Then Andhra Pradesh passed an ordinance, which later became law, tightening regulation of microlenders accused by politicians of profiteering at the expense of the poor by charging usurious interest rates, adopting coercive practices to recover loans from overextended borrowers and causing the suicide deaths of debt-burdened customers.
The ordinance mandated that MFIs specify their areas of operation, interest rates, recovery methods and operational practices. Loan applications were put under government scrutiny; MFIs were asked to stop lending at customers’ doorsteps and to switch from a weekly to a monthly loan recovery system. The rate of loan recovery at microlenders in Andhra Pradesh fell to as low as 10-15%.
“The challenge has nothing to do with fundamentals,” Akula said in a conference call with investors on Monday. “The challenge is political.”
He said the challenge came from forces opposed to free markets and free enterprise, adding: “We want to reinvent our means to stay in business.” The “reinvention” includes consolidating its existing customer base, acquiring new customers, diversifing product portfolio and resolving the situation in Andhra Pradesh, he said.
In the quarter ended 31 March, SKS set aside Rs 106.2 crore for bad-loan loan provisions and write-offs, compared with Rs 14.8 crore a year earlier, mainly for mounting defaults in Andhra Pradesh.
Credit Suisse Group on Monday joined JPMorgan in downgrading the SKS stock. “We see little hope of AP (Andhra Pradesh) book recovery now and expect 90% of it to turn into NPLs (non-performing loans) in FY12,” it said in a report.
Avendus Capital analyst Jaynee Shah, however, wrote in a client note that the impact of credit losses in Andhra Pradesh has now been priced into SKS’ stock and maintained an “add” rating on it, with a target price of Rs 374.
“We believe the Street is not factoring in the profitability and growth potential of the non-AP loan book,” Shah wrote. “The excessive price correction on back of increased write-offs in the AP business is overdone in our view.”
SKS has Rs 1,285 crore of Andhra Pradesh exposure, out of total loans outstanding of Rs 4,111 crore, and it can still expand its non-Andhra Pradesh portfolio by 50% this fiscal with return on assets at 3.6%, said chief financial officer Dilli Raj.
The business model of MFIs has come under a cloud following the Andhra Pradesh ordinance, but the industry insists that it’s still relevant given a proper regulatory environment.
“Very often, the way the stock price movement takes place appears to be irrational, driven by sentiment rather than fundamentals,” said Alok Prasad, chief executive officer of the Microfinance Institutions Network, an industry body. “We hope in SKS’ case, it (selling) is overdone and the fundamentals will prevail over sentiment.”
Mint’s Ashwin Ramarathinam in Mumbai and Reuters contributed to this story.
Graphic by Paras Jain/Mint