SKS’s strong market debut boosts IPO outlook

SKS’s strong market debut boosts IPO outlook

Mumbai: A strong market debut for Indian lender SKS Microfinance, which counts US billionaire George Soros as one of its investors, has boosted prospects of more such offers in the world’s largest market for small loans.

SKS, India’s largest microlender, rose as much as nearly 18% on Monday, the best debut performance among major issues since March, after raising about $358 million to become the country’s first micro finance institution to tap the market.

“Subscription and listing performance both show that if there are new themes, and if it is coated by the India growth story, there is investor appetite," said Jagannadham Thunuguntla, head of equity at SMC Capitals in New Delhi.

“You saw that in MakeMyTrip and now in SKS," he said, referring to Indian travel company MakeMyTrip Ltd whose shares surged as much as 92% in their US stock market debut last week.

Founded by Vikram Akula, a former McKinsey consultant who was named one of the world’s most influential people by Time magazine SKS has nearly 7 million clients and has disbursed close to $3 billion in total. It claims a 99% repayment record.

“The shares have opened much higher than expected," said Arun Kejriwal, director at KRIS. “It will give an opportunity for more more micro finance institutions to come to the market."

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.

At 12:35 pm, shares in SKS that gives tiny loans to poor women, were up 13.6% at Rs1,118.65 on the Bombay Stock Exchange (BSE). The shares rose as high as Rs1,159.90 in early trade.

The stock is the third-largest major stock in terms of volume with 4.3 million shares changing hands.

“This is a new concept and I believe the company’s business strategy will play out well in the medium to long-term," said Dhara Kapadia, a retail investor in the SKS share offering. “The SKS listing gains has changed my sentiment towards the markets."

State-run Coal India, the world’s largest coal miner, last week filed a draft prospectus for an initial public offering to raise as much as $3 billion, and the issue is expected to hit the market around 15 October.

Since April, India has raised $260 million by selling shares in state-run utility SJVN’s IPO, and another $211 million through a share sale in Engineers India. Both offers saw strong response from investors.

Other government share sales in the pipeline this fiscal year include public offerings in Steel Authority of India Ltd, Hindustan Copper and Power Grid.

SKS had received bids for 13.7 times the 16.8 million shares on offer in its IPO and had priced the shares at Rs985 each, at the top end of the indicative price band.

Profiting from poverty?

Akula set up SKS as a not-for-profit body in 1998 and converted to a for-profit model five years ago. High-profile investors such as venture capitalist Vinod Khosla and Infosys founder NR Narayana Murthy were drawn to it, in a country where 40% of the 1.2 billion population lives on less than $1.25 a day.

“If you look at the market opportunity there is a tremendous opportunity to grow," Akula said after the listing. “Across the country there are 150 million poor households and only 22 million households have access to finance. There is a large unmet need.

SKS’ is the most high-profile listing of a microfinance firm globally since the 2007 debut of Mexico’s Compartamos and has drawn keen interest from countries with major microfinance industries, as well as the private equity firms who have recently piled into the sector.

“Capital markets globally have not had many chances to taste issues from this sector though there is debate about these institutions whose very purpose is social justice and financial inclusion," Thunuguntla said.

SKS has been criticized for charging a 28% interest rate to its borrowers, mostly poor women in self-help groups who take collateral-free loans of about Rs12,000 ($261) to buy cows or set up small shops.

The company plans to use the sale proceeds to augment its capital base to meet future capital requirements, which are likely to be fuelled by growth in the business, the company had said in its offering prospectus.

There are more than 400 active microfinance institutions in India serving about 70 million poor people, according to industry estimates. With a potential base of 120 million unbanked homes, microcredit demand in India has the potential to rise sharply.

While microfinance has existed in many forms for decades, the sector has burgeoned into a large market since Muhammad Yunus, a Bangladeshi economist, was awarded the Nobel Peace Prize in 2006 for increasing access to finance for the poor.