Mumbai: SKS Microfinance raised about $358 million in an IPO after pricing the sale at the top end of an indicated price band, signalling strong investor appetite and the likelihood of more such offers coming to market.
The IPO, which values the firm that gives tiny loans to poor women at $1.6 billion, has drawn such high-profile investors as billionaire George Soros, venture capitalist Vinod Khosla and Infosys Technologies founder N.R. Narayana Murthy.
The initial public offering, which closed Monday, was priced at Rs985 ($21.3) a share, said a source, who could not be identified because he was not authorised to speak to the media.
The sale of 16.8 million shares received bids for 13.7 times the shares on offer, stock exchange data showed. The company last week allocated 3.02 million shares at the same price to 36 cornerstone investors, including the fund management arms of JP Morgan, Morgan Stanley and Goldman Sachs.
Some microfinance institutions (MFI) and not-for-profits have criticised the IPO, the first from an Indian MFI and one of only a handful in the world, for its high pricing and the sale of shares by private equity investors who stand to make millions.
But others say it is a sign that MFIs in India, where 40% of its 1.2 billion population lives on less than $1.25 a day, are quickly reaching scale and drawing serious investors, enabling financial inclusion in Asia’s third-largest economy.
“If investors are making money of it, it’s clearly a profitable industry, which is not necessarily a bad thing,” said Olivia Donnelly, executive director of UK-based Shivia Microfinance, a non-profit which focuses on India and Nepal.
“It’s also really down to supply and demand: there are several socially conscious investors chasing after a few firms such as SKS that are seen as doing good,” she said.
Micro credit bubble?
But the danger with so much capital, especially private equity, sloshing about is high valuations, Donnelly said.
SKS is valued at more than six times book value, or three times the global average, and higher than other Indian MFIs, according to The World Bank’s Consultative Group to Assist the Poor.
“The good news is: MFIs are growing, they need capital. And investors want microfinance exposure. They’re buying MFIs like they bought IT 10 years ago,” said Xavier Reille, a CGAP manager.
“But the valuations don’t reflect earnings expectations, they’re due to excess capital flows. We don’t see fundamentals backing these valuations. It can only lead to disappointment.”
At least half a dozen large Indian MFIs, encouraged by the response to SKS, may be contemplating IPOs, analysts say.
These may include Spandana Sphoorthy Financial Ltd, Share Microfin Ltd, Asmitha Microfin and Bhartiya Samruddhi Finance. “Clearly, now that SKS has got this kind of valuation, others will be looking at similar or even higher valuations,” said Pankaj Agarwal, an analyst at brokerage Execution Noble which had an “Avoid” recommendation on the SKS IPO.
“But the valuations don’t reflect the risks inherent in the business model: rising costs, worsening credit quality, risk of defaults, regulatory risks, high leverage levels and pressure on yields, which leaves little scope for return ratios to expand.”
Listing will bring additional pressure to perform, he said.
Muhammad Yunus, the Nobel Prize-winning pioneer of microfinance in Bangladesh, has warned that profit-making MFIs are no different from loan-sharking moneylenders.
In India, the sector desperately needs credit bureaux to maintain low delinquencies, and better governance, said World Bank’s Reille.
With a potential base of 120 million unbanked homes, likely credit demand of about $270 billion is the highest in the world.
“One of my concerns is responsible lending. There’s no discipline; the industry should be careful there is no over-heating, that there’s no bubble,” Reille said.