Se investments ltd (532900) hbj capital - 10in3 small cap multibagger stock reco for nov'09
SE Investments Limited [Code 532900]The company is a NBFC registered with RBI and has its primary focus on Microfinance. It is one out ofthe top 10 MFIs in India by the total loans outstanding. Recently two of the most reputed FIIs – UKBased Investment firm – Elara Capital and Standard Chartered Bank have picked up 5.22% and 9.87%stake in SEIL. Looking at the future growth potential of Microfinance, this stock is available at anattractive valuation. HBJ Capital, India Web: www.hbjcapital.com Mail: Info@hbjcapital.com Call: +91 98867 36791
Best Buying Price… 2 Phase Systematic buying suggested [Always buy in SIP ways] Phase – 1 : Buy around Rs225-235 [75% of your planned investment] Phase – 2 : Accumulate further below Rs200 [Remaining 25% of your planned investment] >>>Expect at least 10 times returns in next 3 years time frame!!!
HBJ Cap is growing faster than ever. HBJ Capital can be your 50x in 3years investment. Ask how? Aim to become #1 - Equity Research Company in India by 2012, the same year we have planned to get it listed at BSE/NSE. What Next?HBJ Capital – “Specialists in discovering multibagger stocks” is launchingmore & more innovative products & services with single focus on long term wealth creation!!!
Table of Contents From the desk of CEO, HBJ Capital. Financing the Poor and Unprivileged – Page#7 MFI s in India – Page#13 SE Investments Ltd – Page#17 Business Verticals – Page#20 Insights into Operations – Page#27 Defining Factors– Page#34 Peer Comparison – Page#41 Financial Analysis – Page#43 Share Holdings pattern – Page#47 Best Buying Price – Page#50 Challenges / Risks involved – Page#53 Know more about Your - HBJ Capital.
From the desk of CEO, HBJ Capital Dear Investors, Microfinance as a sector has How many times we have cribbed the banks for asking us too manybeen growing at very impressive documents while applying for any loan? How many times we feel growth rates. The sector is completely supply driven and irritated going back to the banks again and again to get the closure the demand is far outstripping and the approval for the loan that we had applied. But, never the supply. Considering that the mind, the truth remains that we are all highly privileged people. sector as such grows at a very high CAGR of 50%, it would take at least 7 years to fulfill the Consider the fact that there are millions and millions of households current demand. SEIL is the 7th in India, to be more precise – more than 150 million households largest MFI in India. It is good with absolutely no access to credit. These are people who arethat I will invest, just after the FII extorted by local money lenders who get at least 36% interest PA. s. Now, tell me, are we not the privileged ones ? These millions and millions of households do not get access to credit from banks that you and I get. The reason is not that they cannot repay the loans. How is it then that most of the MFIs boasts of repayment rates of more than 99%? It is just that banks are hesitant in lending to them and the loans amounts are usually very small. Also, the unprivileged people have the mindset that they are not the ones, the banks will ever care for. But, things are changing along with the changing times.
Contd…Microfinance is the hotspot of private equity deals. Can you believe that more than 40% of the private equitymoney that came into India in the last 18 months went into the Microfinance sector? But the truth remains that, inspite of huge money flows into the sector, the sector is able to address only 10% of the total demand in thecountry.The total demand for microfinance is currently estimated at around 60 billion USD, out of which not even 6 billionUSD is addressed. In such a high growth sector, we are happy that we have found a very good investment avenuefor our subscribers.The 10in3 pick for this month is SE Investments Ltd. One can invest 75% of their allocation at the CMPand the rest 25% can be invested at 200 levels or lower.Most of you would remember that we had once advised our readers to avoid this counter. But then, stock marketsare all about perceptions and perceptions do change. Our perceptions on SEIL have changed dramatically and wehave explained the same in this report.SEIL is one of the MFI s which is currently possessing tremendous value and is largely undiscovered. When I sayundiscovered, I mean only the retail investors. The FII s, true to their nature in spotting the opportunity very early,have spotted SEIL and have picked up 15% stake in the company. But then, HBJ Capital was also almost there andnow, we wish you would also be part of the story.Kumar Harendra, CEO, HBJ Capital,www.hbjcapital.com5th Main, Girinagar, BSK 3rd Stage, Bangalore 85; Call : 098867 36791 or Mail : Info@hbjcapital.com
The huge Indian population which was once seen as a curse of the country is now touted as the boon for the country. Similarly, financing the needy and the unprivileged, which was once looked down upon, is now touted as the biggest financing opportunity.Financing the poor and unprivileged
Financing the unprivileged India has one of the most extensive banking infrastructure in the world. However, million of poor people in India do not have access to the basic banking services like savings and credit. In the past, both public and private commercial banks in India perceived rural banking as a high-risk, high-cost business. On the other hand, rural and borrowers from the bottom of the pyramid felt that banking procedures were cumbersome and that banks were unwilling to give them credit. However, it was not until the early 1990s, that things went for a change. The Indian government realized the need for micro finance to provide rural poor with savings and micro credit services. In the late 1990s, the micro-finance business was boosted by the innovative initiatives taken by non-government micro-finance institutions (MFIs) and banks. They offered micro-credit i.e. credit provided to poor people for financial and business services and for self-employment in rural areas. Nevertheless, the existing banking policies, procedures and systems including deposit and loan products remained untailored to the requirements of the poor. They required better access to services and products rather than subsidized credit. It was, therefore, recommended through the conclusions drawn in a study by NABARD that alternative policies, systems and procedures be put in place in order to boost the growth of micro-finance in India.
Welcome to Changing Times With the recommendations in place, commercial banks were enabled to move into rural areas, albeit the advances given to the poor remained low. To improve accessibility of the existing banking network to the poor, the Self Help Group (SHG)-Bank Linkage Model was launched in 1992 to facilitate empowerment of the poor, while pursuing the macro economic objective of overall economic growth. Currently, a range of institutions in both the public sector and private sector offer micro-finance services in India. Such institutions are broadly categorized into two categories, namely: formal institutions and informal institutions. The former category comprises of Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide micro-finance services in addition to their general banking activities. The informal institutions that undertake micro-finance services as their main activity being referred to as Micro - Finance Institutions (MFIs). Whilst both private and public ownership can be found in the case of formal financial institutions offering micro-finance services, the MFIs are mainly found in the private sector.
Birth of MFI – Micro finance institution CRISIL pegs the number of households facing financial exclusion in the country at around 120 million. Over the past decade alone, microfinance has played an important role in filling this gap. MFIs are uniquely positioned to facilitate financial inclusion and provide financial services to the poorer clientele. There are no comprehensive legal frameworks for the microfinance sector in India. MFIs exist in many legal forms. However, most of the large MFIs are acquiring and floating new companies to get registered as non banking financial companies – NBFCs, which will help them achieve scale. The term microfinance refers to small scale financial services - both credit and savings, that are extended to the poor in rural, semi-urban and urban areas. Micro credit is the most common product offering from the MFIs. In India, most of the microfinance loans are in the range of 5000 to 20,000. MFIs are the main players in the microfinance space in India; their primary product is microcredit. Other players that extend microfinance services, in addition to their core business include banks, insurance companies, agricultural and airy co-operatives and various NGOs.
MFIs – Business model and working Lending Model - In terms of the lending model, MFIs may be classified as lenders to groups or as lenders to individuals. In India, MFIs usually adopt the group-based lending models, which are of two types - the self - help group (SHG) model and the joint - liability group (JLG) model. In the SHG model, the MFI lends to a group of say 5 to 20 women. Under the JLG model, loans are extended to and recovered from, each member of the group. The most popular JLG model is the Grameen Bank model. However, most of the large MFIs in India following a hybrid of the group models. The model of lending to individuals is similar to the retail loan financing model of banks. In this model, the MFIs usually lend to highly credit worthy individuals who have shown their repayment ability through loans already. Loan repayment - Most MFIs following the JLG model adopt the weekly and fortnightly repayment structure. Those under the SHG model have a monthly repayment structure. MFIs lending to traders in market places also offer daily repayment, while MFIS extending agricultural loans have bullet and cash flow based repayment structure depending on the crop patterns.
MFIs – Business model and working - contdLegal Structure - Interest rates - MFIs following the JLG model charge flat interest rates of 12 to 18 percent on their loans, while the MFI s following the SHG model charge 18 to 24 percent as interest on a PA basis and reducing balance method. Some of the MFIs also charge a processing fee comprising a certain proportion of the loan amount sanctioned at the time of disbursement. Product offerings - Most of the MFIs in India are solely engaged in extending microcredit; a few also extend extensive savings, insurance, pension and remittance facilities. MFIs offer savings services in two ways - the savings are either collected by the MFI or the SHG. In the latter method, the MFI or NGO encourages the SHG to collect savings from each member of the group. AN MFI collecting savings from borrowers may either make it compulsory for borrowers to have savings with it.
Regionally speaking, India is the largest microfinance market in the world with millions and millions of poor households. Yet, only 2% of MFIs have more than 100,000 borrowers and the demand is far outstripping supply. Is this called opportunity?MFIs in India
Microfinance in India – The Scenario Though there are 1000s of MFI s operating in India under various legal formats, Only 2% of them have a substantial clients base of more than 100,000. Also, close to 90% of the MFIs serve less than 10,000 clients in India. Very Strong Business growth - The microfinance market in India is expected to grow rapidly, supported by the governments initiatives to achieve greater financial inclusion and growth in the countrys retail sector. The microfinance sector in India has passed its evolutionary phase and now the profit oriented working model of the MFIs are widely accepted. The microfinance sector and the MFIs in India are estimated to have outstanding total loans for around 18,000 crore. The microfinance sector in India is highly fragmented with more than 4000 MFIs, NGOs and NGO-MFIs, of which about 400 have active lending programmes. The top 10 MFIs account for more than 75% of the total loans outstanding. Just 17 MFIs had outstanding loans of more than 100 crore as on March 31,2009.
Disbursement and Asset Quality Disbursements - At the end of the financial year FY 09, it is estimated that the MFIs outstanding loans have almost doubled to around 11,400 crore. The growth in disbursements by MFIs was more than that of any other legal formats. MFIs disbursements have increased aggressively at a CAGR of around 90% over the last 4 years. The overall disbursements during the financial year FY 09 is estimated to be around 28,700 crore of which 18,500 crore were made by MFIs. Asset Quality - The key takeaway from the tremendous growth from the sector is that in spite of such aggressive disbursements and expansion in loan books, the asset quality has been healthier. MFIs asset quality indicated by the current portfolio and the portfolio at risk (PAR) by more than 30 days, has improved and is healthier than those of other financial service players in India. The healthy asset quality can be attributed to the strong group pressure and efficient collection mechanisms which have ensured very high repayment rates. The MFIs current portfolio has improved on account of several factors. MFIs business volumes improved by around 46% during the first half of FY 09, while the disbursement increased by around 90% and the loan portfolio by 81%.
Earnings profile and Geographic concentration Improvement in earnings profile - Improvement in lending rates and productivity have helped the MFIs to enhance their operating self- sufficiency ratios. The OSS ratios are believed to increase due to the increased lending rates and the collection of processing fees. MFIs adopting the JLG model have higher lending rates and therefore higher OSS ratios than the ones with SHG model. Most of the MFIs that follow the SHG model provide credit that is cross- subsidized by other developmental programmes. Hence their operating expense ratios tend to be lower that less than 5%. Geographic concentration - Majority of the MFIs, including the larger players, operate mainly in south India until few years back. However, the larger players have been extending their presence to states such as Maharashtra, Orissa, West Bengal and some NE states in the recent years. However, south continues to be the largest market for the MFIs and Andhra Pradesh along with Tamil Nadu contribute to most of the growth in disbursements and the loan books.
The company is a NBFC registered with RBI and has its primary focus on Microfinance. The company is one out of the top 10 MFIs in India by the total loans outstanding.SE Investment Limited
SE Investments Ltd (SEIL) Sunil Enterprises Investments Limited – SEIL is registered as a category “A” – deposit taking NBFC with Reserve Bank of India. Initially, it was promoted as a private limited company under the Companies Act, 1956, on 05th March, 1992. On 01.03.1995, fresh certificate of incorporation, consequent upon conversion to Public Limited Company was granted by the office of the Registrar of the Companies, Uttar Pradesh, Kanpur. The company has business interests in microfinance, financial services and Alternate energy. However, the current focus and the road ahead for the company is based on the Micro finance division. The company which forayed into the Microfinance division in the year 2006 has a proven track record and is counted as one of the top 10 Microfinance companies in India, based on the total Loan amount outstanding at the end of financial year FY 09. The company has been successful in its microfinance division and it can be attributed to the fact that the company has been engaged in providing financial services and lending products since 1992. The microfinance operations of the company is concentrated in parts of Uttar Pradesh, Delhi, Gujarat and Rajasthan.
SE Investments Ltd – Snapshot (Nov 22 2009)CMP – Rs. 229.80 (The stock price currently holds Face Value – Rs. 10tremendous value. There is a strong support for thestock price at 200 levels.) Promoter’s holding – 31.05% (With the recent amalgamation, we expect that the promoter’s holdingMCap – 120.42 crore (When we started working on will increase to around 60%)the report, the stock was commanding a market cap of70 crore. It was only then the amalgamation of Unnati FII’s holding – 15.09% (Two of the most reputed FII s –financial happened, increasing the market cap. We Elara Plc and Standard Chartered Bank have picked upexpect increased earnings due to this amalgamation.) stakes in the company very recently.)PE – 6.48 (There is tremendous scope for PE rerating in Total # of shares – 52.4 lac sharesthe stock.) Liquidity – Low to Medium (number of shares tradedEPS – Rs. 59.13 (Based on TTM basis. We expect the usually ranges between few 1000s to 10K shares. Thenet earnings of the company to grow at a CAGR of stock has also shown volumes in excess of 10K on many50% in the next 3 years.) days. However, many times, the volumes tend to be lesser than 1000 also)52 Week High / Low – 144 / 374.75 (The stockmade its life time high of 570 in Sep 2008. However, Website: http://www.seil.in/the October carnage pulled down the stock price to itslows.)The calculation of PE based on EPS and net earnings willnot lead to the same market cap, since the EPS for thelast 4 quarters does not reflect the amalgamation yet.
The company operates in three segments – Microfinance, Business loans and Alternate Energy.Business Verticals
Business Verticals – Alternate energyAlternate energy - The company has invested Rs16.4 crores (Rs12.6 crores during the 2004-05 financial year andRs3.8 crores during the 2005-06 financial year) in wind energy generation in windmills in Karnataka and Jaisalmer.During FY 2005-2006, a new wind energy generator was set up in Jaisalmer. The total inflow from the sale ofenergy was Rs2.4 crores during the last financial year.The company also proposes to initiate bio-gas based electricity generation plants in the current financial year. Theseplants will utilize the bio waste generated in the clients’ agricultural lands (crop wastes) and the bio wastecreated by the cattle.However, it should be noted that the company forayed into the alternate energy division prior to the foray intomicrofinance division and that no major expansion plans were laid out after FY 06.Currently, the alternate energy division especially wind mills are used only for the tax reduction purpose. For thefinancial year FY 09, this division contributed to less than 5% of the company’s revenues. However, there may be anincrease in revenues from this division through the bio waste projects.
Business Verticals – Business LoansBusiness Loans – This business segment contributed to less than 30% of the revenues in FY 09. However, after theforay into the Microfinance segment, the focus has mostly shifted to this new division. Business Loans segmentcontributed for around 60% of the revenues of the company in FY 06 and it came down to around 30% in FY 09,owing to the increase in Microfinance division.However, this vertical provides strong margins to the company, since the interest rates for the products under thisdivision is usually between 16% and 33%. This business division continues to be a strong contributor for the highmargins for the company.Due to the higher loan amount size (greater than 20K and 1 lac), this is not categorized under the microfinancedivision. However, most of the clients here have the same profile as the microfinance customer.
Business Verticals – Business Loans (contd) • Focus on a large clientele of small businesses, family run enterprises and traders • Transactions are based on qualitative and quantitative assessments • Focus on credit history, local knowledge of the operating segment and an understanding of the performance of the entity • Pricing reflective of the risk assessment of the client • Competitive advantage of fast and efficient decision making • Quick processing • Robust reminder and collection process Growth fuelled by Inter corporate deposits -
Business Verticals – MicrofinanceMicrofinance – The company forayed into the Microfinance division in the year 2006 and since then the companyhas witnessed strong growth rates in the number of clients, total loan outstanding, loan book size and revenues.This division contributed to around 65% of the revenues for the company in FY 09, which increased from the neat50% in the financial year FY 06.The company has a clear emphasize on this division, which can take the company on the strong growth path in theyears ahead. This division will be a strong contributor to the revenues, while the business loans division will be thestrong contributor to the margins and the net earnings.In the financial year FY 09, the company had total loan disbursements of around 226 crore recording a 43% jumpover the previous year.
ClientsSEIL has witnessed strong growth rates in the number of clients. The company ispart of the just 2% of the MFIs with more than 100,000 clients.The company envisages on supporting 400,000 households through variousmicrofinance schemes by the end of 2010.
Since the company is a NBFC from Microfinance segment, it becomes pivotal to understand about the various loan products, how funds are mobilized, the staff productivity and the quality of the portfolio.Insights into the operations
Various financial productsThe Microfinance loan products are the largest contributors with around 65% of the revenues in FY 09, followedby Business loans at just less than 30% of revenues and Personal loans along with the alternate energy divisioncontributing for the rest.The Daily recovery loan scheme contributes for very negligible percentage.While the Business loans contribute for higher margins in operations, the Microfinance loans support the stronggrowth in the revenues.The interest rates for microfinance loans are believed to have gone up from 14% to 16% in the recent months.
Portfolio StatisticsIn the last five years of operation leading to Mar 2008, SEIL’s portfolio (including securitized portfolio) has grown10 times at a CAGR of 77% PA from Rs19.7 crore on March 2004 to Rs192.8 crores as on 31 March 2008 and toaround 250 crore by the end of the fiscal year FY 09.The average outstanding loan size has decreased from Rs27,357 on March 2007 to Rs22,333 as on 31 March2008. This is because of the increased proportion of microfinance loans in the overall portfolio.
Fund mobilization – Deposits and Equity The access to funds is one of the key driving force behind the company’s growth rates and its success. Hence, it becomes pivotal to understand how the funds are mobilized. The three primary sources of funds have been Deposits, Bank Loans and Equity. Deposits - The company accepts fixed deposits from the public as well as from companies. The total deposits outstanding (including inter corporate deposits) at the end of the financial year FY 09 was Rs43.0 crores. The contribution of public deposits on the total deposits have decreased from 87.3% on March 2005 to around 25% on March 2009 while the proportion of inter corporate deposits have increased from 12.7% in March 2005 to around 75% on 31 March 2009.Equity – Since the IPO of the company, the company has not been making using of equity to raise funds foroperations. However, there have been changes in this context and the company has started using equity to raisefunds.We believe that the company will continue to make use of the Equity allocation route to raise money in the future.During the financial year FY 09, the Company made a preferential issue of 25 Lacs 10% Non CumulativeRedeemable Preference Shares of Rs. 10/- each at a premium of Rs.90/- per share after taking the approval ofmembers in their Extra-Ordinary General Meeting held on 29 December 2008. By this issue, the Company hasraised the funds for an aggregate amount of Rs.25 Crores for its growth objectives. The company has also beenissuing equity shares to foreign investors to raise money.
Fund mobilization – Bank Loans As on 31 – 03 - 2009Banks as part of their obligations towards priority sector and as laid out by RBI, have to provide at least 40% of theirtotal lending portfolio to priority sectors such as Agriculture, Exports, Rural and the Poor. In order to meet theobligations, most of the banks lend to the MFIs which in turn provide microfinance to the poor, rural and agrihouseholds.SEIL had borrowed funds from diversified sources. The total outstanding borrowings had increased from Rs57.9Crores on March 2007 to more than Rs125 Crores as on 31 March 2009.In the financial year FY 09, HSBC Bank and Punjab National Bank were the newer ones to start lending to SEILthrough Term loans.
Staff ProductivityThe staff productivity of SEIL is good at 402 borrowers per field staff as on 31 March 2008.The company has shown impressive improvements in productivity over the years with the Number of borrowers /Field Staff improving from just 90 at the end of FY 06 to 402 at the end of FY 08.As their staffs become more familiar with microfinance, their productivity is expected to grow.
Credit Performance and Portfolio QualitySEIL has good portfolio quality with an overall repayment rate of 97.9%. PAR (> 60 days) was 1.6% ason 31 March 2008 against 2.4% on March 2007. The ratio of total overdues to the total loan outstanding was0.9% as on 31 March 2008.The figures in the above table suggest that the organization has good recovery mechanisms, which enables it torecover most of the overdues within 30 days.
There is nothing as perfect in the world ofinvestment. Each and every investment optionwould carry both positives and negatives factorswhich would affect the company in the years tocome.It is here that we make sure that the positive factorshave a overwhelming impact on the company.Defining Factors
Defining Factors – Demand Supply mismatch With a 3 year time frame, we believe that the following would strongly impact the company and define its growth. These factors will also be the key reason as to why SEIL has the opportunity to be a wealth creator. Strong Demand from the microfinance sector – A recent report from the world bank states that the existing demand for micro credit in the country is 60 billion USD. This assumption takes into account that there are 150 million poor households in India, with an average credit demand of 20,000 rupees. However, the supply from the sector is just 10% of the demand and the demand outstrips supply by a large extent. We believe that the demand will continue to rule higher than the supply for many more years to come, thus paving the way for a strong growth of the MFIs involved. It is estimated that the number of borrowers is estimated to touch 35 million in March 2011 as against 21 million in March 2009. Resources will be a key challenge as MFIs would need borrowings of more than Rs 65,000 crore over the next two years. The huge demand supply mismatch will make sure that the companies like SEIL record very strong growth rates at least for the next 3 years.
Foray into Micro housing segmentSimilar to microfinance or micro credit, micro housing is a huge untapped market in India. It is to be noted that more than90% of India’s work force will come under the micro housing segment. Again, very similar to microfinance, this spaceis hugely untapped, with demand outstripping supply by even larger extent. It is also true that the supply is veryless or negligible.SEIL has forayed into the Micro housing segment where it will provide financial support to total areas of about 300 to 350square feet. The financing is based on regular interest payment and principle payment as per convenience.The client usually pays the interest equivalent to the rent he currently pays for living in a slum / shanty. Themicro housing segment of SEIL is currently in the pilot phase with around 500 units at Agra, UP.Also, the intention of SEIL to have a presence in the micro housing segment becomes more evident with the amalgamationof Unnati Financial Services. This company that will be part of SEIL from the current quarter has huge experience in themicro housing segment.The story of Affordable housing is panning out in a big way and the total market for this segment is pegged at around300,000 crore by 2011. It is highly likely that the micro housing initiatives of SEIL and other MFIs will serve the bottom ofthis pyramid.
PE re-ratingCurrently, the market cap of the company is 120 crore, with around 52.4 lacshares of Rs.10 each. The company witnessed an increase in the market cap andthe equity base last week, when Unnati financial services was merged with SEIL.Prior to that, there were only 31.4 lac shares in the company and the marketcap was only 72 crore. On a TTM basis, the company was available at avaluation of just 3.88 on net earnings of around 18.57 crore. However, afterthe amalgamation, the current valuations is 6.88.Since the current financials does not accommodate the numbers fromthe new entity and since that foreign investors came in prior to theamalgamation, we will base our PE rerating views on the companynumbers prior to amalgamation.The new entity – Unnati financial services’ contribution to the top line and thebottom line will be visible only from the current quarter. However, the presenceof merged entity is already accounted through the changes in the market cap,number of equity shares and the book value.Even though we will consider the valuations prior to amalgamation, it shouldbe noted that the valuations after amalgamation at 6.88 is still lower andpromises value.Also, our expected ramp up in net earnings due to the amalgamations mayreduce the valuations of SEIL to the older levels. (at the CMP)
PE re-rating – Foreign InvestmentsMany of you would remember that we had come out with an article on SEIL, where in we advised the readersto avoid it. One of the foremost reasons for our call, has been that in spite of business looking good, thecompany was not able to attract any foreign investments or private equity money as such.We were really discouraged by the fact that even though Microfinance contributed for more than 50% of the Private equitymoney that came into India in the last 1.5 years, SEIL was not able to attract even a single rupee. This negative factor indeedlead us to believe that something may be wrong with the company in spite of the very good valuations and the huge valuethat the stock had.However, our questions were answered and SEIL has attracted foreign investments. Its just that we were very early inindentifying the happenings.Two of the most reputed FIIs – UK Based Investment firm – Elara Capital and Standard Chartered Bank havepicked up 5.22% and 9.87% in SEIL very recently.The company which did not have any FII participation just 2 months back is now have FII holdings to the extent of 15%. Itis to be noted that Standard Chartered Bank in spite of picking up 7.67% from the promoters, it was not happy that it wenton buy another 2.20% from open market.It is highly likely that SEIL will continue to attract foreign investments and hence more interest on the stock, leading to avery good ramp up in valuations.
PE re-rating – Listing of Peers One of the foremost reasons as to why SEIL’s valuations are lower is that the company is the lone MFI listed on the exchanges. Though this status should have increased the premium for the company, that has not been the case, since there were many other MFIs operating that were not part of the exchanges. While that has been the case with the institutions, not many retail investors really know that a company named SEIL is into Microfinance and that it is listed. However, as and when more and more MFIs take the listing route and when Microfinance becomes a listed sector, we will see SEIL garnering more attention. We believe that these changes will take place in the next one or two years time. The microfinance sector has been so hot that it accounted for more than 40% of all the private equity deals in the last 20 months. As more and more foreign money started chasing the MFI s, the valuations and the asking rate were on a constant increase and it has achieved a stage where in the investors absolutely do not find value in it. The asking rate from the MFI s have increased to the extent of 7 times the book value. Due to this very reason, the PE funding has highly dried up to the companies in this sector in the recent months. Many MFI s may list soon - Not only the industry leader - SKS Microfinance, but many of the other for-profit MFIs have received private equity investments. The kind of growth that the companies are witnessing and the huge capital pressure coupled with PE players asking for exit routes may result in a slew of listings from this space in the next 2 years time. Also, it is to be noted that most of the top 10 MFIs in the country have been publishing audited financial results and their balance sheets.
Amalgamation of Unnati Financial Services After receiving all the necessary approvals from the share holders and the High Court in Delhi, SEIL had merged Unnati Financial Services, a promoter group company with itself. Unnati Financial Services is a company with a very rich experience in Micro housing segment and possesses the technology of bio-power production using bio gas. For the purpose of Amalgamation, the company had allotted 21 lac shares of Rs.10 each to the share holders of Unnati Financial services. Consequent to the allotment, the paid up equity capital of the company stands increased at 7.7 crore comprising of 52.4 lac shares of Rs.10 each and 25 lac 10% non cumulative redeemable preferential shares. Unnati financial services had the same board as SEIL and it is highly likely that they shares the same promoters as well. We believe that SEIL will be highly benefited from Unnati’s presence and experience in Micro housing and bio power production. Also the operational cost of SEIL is likely to come down going forward. The amalgamation also falls in line with the plans of the company to promote biogas and bio fertilizer business across its operational area thus generating employment and micro credit – simultaneously serving the energy needs of the client households.
A smaller company like SEIL has scored well incomparison to its peers on many operationalparameters.Peer Comparison
Peer ComparisonSEIL is the 7th largest MFI in India (excluding SKDRDP which is a trust) based on the Loan amount outstanding as on Mar31,2009. It is very evident from the above comparison that SEIL can rub shoulders with many of its larger sized peers onvarious parameters. For Ex – SKS with around 3900 crore of disbursements, 17 times that of SEIL, has managed to makerevenues of only 554 crore – 11 times that of SEIL.The margins of SEIL is way higher than that of its peers mainly on the reason that its areas of operations are concentratedwhen compared to the Pan India presence of most of its peers. Also the operating expenses of SEIL is much lower.Though SEIL, 7th largest MFI makes net earnings that is greater than the 5th largest MFI, there are point where SEIL needsimprovements.The customer base of SEIL is very low when compared to its peers. Also, the company, being conservative does not leverageitself very much. The Debt / Net worth ratio is the lowest, indicative of its conservative stand on the business.Overall, SEIL, in spite of its smaller size, stands well against its peers on many parameters and it needs toconcentrate on geographic expansion and leveraging its networth.
The company’s balance sheet suggests that it is conservative in nature. Also, SEIL has a good headroom to leverage itself.Financial Analysis
Profit and Loss Statement - Yearly Both the Sales and the net earnings have more than doubled in the last 3 years. The net earnings for FY 09 actually grew by 46%, considering the fact that net profits for FY 08 was increased due to the company deferring taxes for around 2 crore. The company has been increasingly becoming more efficient with the operating margins increase from 70% in FY 07 to 76% in FY 09. Also, the net margins have seen an increase from around 24% in FY 07 to 28% in FY 09. On a AS-IS basis, for the next 3 years, we expect the company to grow its earnings at a CAGR of more than 45%.
Profit and Loss Statement - Quarterly The company has been witnessing strong growth rates in the last 2 quarters due to the infusion of fresh capital into the company. For the last 2 quarters, the company has reported net earnings growth of more than 75% on a more than 50% increase in sales. Also, the key efficiency ratios are on a constant upward move.
Balance Sheet The net reserves of the company has been on a growth path. It had even doubled in the latest financial year. The net worth of the company is very strong and the Total debt / net worth of the company is just 2.3 and this would enable the company to fuel growth going forward. The FY 09 balance pegs the total outstanding loans as on Mar 31, 2009 at around 195 crore. The company has been assigning enough provisions in its books. Though the company wrote down only 2 crore in the Financial year FY 08, it has provided provisions for around 3.8 crore. The balance sheet clearly suggests that the net worth and the assets of the company have increased impressively and the company has been conservative and low on leverage. There is enough head room for growth with the current financial condition of the company.
The share holdings of the promoters are set to increase by a huge margin. Also, Foreign investors have started to show interest in the company.Share Holdings Pattern
Latest Share holding pattern Per the latest filing by the company, the promoters own around 38.81% in the company and this has been unchanged for more than 2 years. However, after the filing two key changes have happened that impacted the promoters holdings. Standard Chartered Bank picked up around 7.76% directly from the promoters, thereby reducing their holdings to 31.05%. But, it was after this that the amalgamation of Unnati financial services took place, where around 21 lac shares were allocated to the promoter of Unnati financial. We believe that the promoters of Unnati were same as that of SEIL. Consequently, we expect the promoters holding in the company to be more than 60%. It should also be noted that there can be indirect holdings in the company through the 30.47% stake owned by the corporate bodies.
Latest Share holding pattern Per the latest filing, FII s hold around 5.22 % stake in the company. Elara Capital Plc is a full service investment bank headquartered in London. After the Sep filing, Standard chartered bank has picked up 9.87% stake in the company in two transactions. The first transaction was between Standard Chartered bank and the promoters and in the next one, the banks had directly picked up around 2.20% stake in the company from the open market. The average cost price was 224 rupees in the first transaction and 223.13 rupees in the second one.
One can invest 75% of their allocation at the CMP and the rest 25% can be invested at 200 levels or lower.Best Buying Price?
Last 2 years chartDuring last two years, stock has made its life time high of 570 in Sep 2008. However, the October carnage pulleddown the stock price to its lows.From May-Sept’09 it was trading below 100 DMA but after some bulk deals and you can see increased volume inSept’09, the stocks price is well above 100 DMA. There is strong support at 200 levels & it can find resistance above300.
Last 6 months chartAt CMP of 229, stock is trading in overbought zone. This upward momentum is likely to continue till 300 levels,above which it will find tough to sustain.One can invest 75% of their allocation at the CMP and the rest 25% can be invested at 200 levels orlower.
Any investment for capital appreciation carries an associated risk with it. What are the risks that could derail the growth prospects for this company?Challenges / Risks involved
Challenges / RisksThe following are the probable risks involved with the investment in this company.Increase in Competition – The Microfinance sector in India is witnessing increasein competition almost on a daily basis. There are many local, national andinternational players joining the party. Though the sector is supply driven and thatthere is huge headroom for growth, increase in competition will become a majorconcern going forward.Geographic Concentration – In spite of SEIL running its business in a veryefficient manner with higher margins, it is due to the fact that its coverage area issmall and hence many of the operational costs naturally tends to be lower.Currently, SEIL is active only in parts of UP Rajasthan and Delhi, while most of its ,peers have presence in at least 15 states. The company should start diversifyingitself geographically.Access to funds– SEIL, like any other MFI will face funding pressure to keep upthe growth rates. More than access to funds, it should make sure that the funds areavailable at a reasonable cost. Currently, SEIL is unable to garner funds at lowercosts, when compared to its larger peers. Though there will be increase in fundingfrom banks, the demand will only be much larger going forward.
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