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Sks Microfinance Ipo Update


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Sks Microfinance Ipo Update

  1. 1. Visit us at July 26, 2010 SKS Microfinance IPO Fact Sheet Issue details Microfinance too can be traced to a non profit non- Issue opens : July 28, 2010 government organisation (NGO), Swayam Krishi Sangam (SKS) Society. SKS Microfinance in its current avtar came Issue closes : August 2, 2010 into existence in 2009 when it converted itself to a public Issue size (amount) : Rs1,427-1,654 crore limited company (from a private limited company). Offer size (no. of shares) : 16,791,579 shares Led by an experienced senior management (ex-bankers, Fresh issue : 74,453,23 shares consultants), the company has grown its operations very Offer for sale by Sequoia : 9,346,256 shares rapidly over the years. As on September 2009, the company Of which, operated in 19 states with 1,627 branches covering 5.3 million members with outstanding portfolio of Rs2,800 crore. - QIB portion : 60% The rapid growth has been aided by financial support from - Non-institutional portion : 10% private equity investors. - Retail portion : 30% Key positives Face value : Rs10/share Mammoth business opportunity... Price band : Rs850-985 per share India offers a mammoth business opportunity—unparalleled in size—for MFIs. Of the total Indian population, there are Object of issue approximately 825 million poor people in India. The Through the initial public offering (IPO) the company intends penetration of microfinance in these households (as per 2009 to augment its capital base to meet the future capital Bharat Microfinance by Sa-Dhan) is estimated to be at just requirements arising out of growth and to achieve the 22.6 million MFI clients and 63.6 million SHG clients. This benefits of listing on the stock exchanges. implies a vast untapped market for MFIs in India. The following map clearly highlights India’s position relative to Share-holding pattern the other nations. SKS Microfinance being the leading MFI Pre-issue Post-issue in the country is well placed to capture the opportunity Others offered by the huge demand-supply mismatch for 3% Public microfinance in India. 23% Promoter Group Institutions % of households with account in a financial institution Others 37% Promoter 41% 3% Group 56% Institutions 37% Company background SKS Microfinance is a leading MFI providing loans to individual members (women) in a group (it follows the JLG business model) with each group consisting of five members. In line with the transformation of the microfinance industry from non-profit activity to a for-profit business, the roots of SKS Source: ‘Finance for all’, World Bank 2007 Sharekhan Ltd Lodha iThink Techno Campus, 10th Floor, Beta Building, Off. JVLR, Opp. Kanjurmarg Station, Kanjurmarg (East), Mumbai – 400 042, Maharashtra.
  2. 2. sharekhan ipo flash SKS Microfinance What is microfinance? With increased area of operation and scaled-up activities, Microfinance is the extension of very small loans microfinance is increasingly gaining credibility in the (microloans) to the poor and is designed to spur mainstream finance industry with many traditional large entrepreneurship. Those living in poverty lack collateral, finance organisations contemplating a foray into this steady employment and a verifiable credit history, and business. From geographical perspective, the microfinance therefore cannot meet even the most minimal qualifications activity has traditionally been concentrated in southern to gain access to traditional credit (through banks). India (57% of the microfinance institutions (MFIs) and Moreover, despite increased penetration of banking services approximately 71% of the microfinance borrowers of the since the nationalisation of banks in 1969, rural India country are from this region). remains underserved by banks. Microfinance has attempted Types of business models to fill the void left between mainstream commercial banks The basic business model being used in commercial and private money lenders, and has emerged as a fast- microfinance in India was innovated by Grameen Bank growing provider of financial services to the poor. and later improvised by several players over the past Transformation to for profit model quarter of a century across India with a varying degree of What started as a not-for-profit activity funded by donors success. Some of the models are Joint Liability Group and philanthropists has gradually evolved into the current (JLG), Self Help Group (SHG) and individual banking commercial format of microfinance in India. The scale-up among others. Of all these variations, the grameen type of activities was a major catalyst in this transformation. of business model seems to have been more effective and popular, going by its dominant share in outreach (refer Region-wise distribution of microfinance chart below). 100% 7% 10% 90% 12% 3% Trend in outreach (borrowers in millions) 80% 30% 16 70% 21% SHG 14 60% Ind Bkg 12 50% Grameen 10 40% 30% 60% 8 57% 20% 6 10% 4 0% 2 2004 2009 0 South East & NE West North 2002 2004 2006 2009 Comparative analysis of Microfinance services offered to the poor Parameter Money lenders Commercial banks Govt sponsored Financial programme programs of MFIS' Ease of access High Low Low High Lead time for loans Low Very high Very high Low-medium Repayment terms Very short Extreme long Extreme long Short Interest rates Fixed and rigid Fixed and easy Fixed and easy Flexible Incentives None None None Repeat and larger loan Repeat borrowing Possible Possible but likely Possible but likely Stream credit is assured Loan access procedure Very quick Extreme time consuming Extreme time consuming Simple and quick Collateral and demand Mandatory Required but Not required although Not required social collateral promissory note hypothecation a charge on the assets is used for physical collateral of asset may suffice become automatic Sharekhan 2 July 2010
  3. 3. sharekhan ipo flash SKS Microfinance Microfinance supply and demand in India, FY2008 conducting their financial affairs and are prompt in repaying 60 51.4 their loans. Failure by an individual member to make timely 50 loan payments will prevent other group members from being able to borrow in the future. Hence, the group typically In USD billion 40 makes the payment on behalf of a defaulting member or in 30 the case of wilful default, uses peer pressure to encourage 20 the delinquent member to make timely payments. 10 4.3 Effectively, this model provides an informal joint guarantee on the member’s loan. 0 Microfinance Supply Microfinance Demand Enviable asset quality Source: DRHP, Sharekhan Research The secret of the healthy asset quality, despite the risky ...and conducive policy changes... nature of customer segment and the scorching balance sheet The policy of the Government of India has long favoured growth, lies in the business model. SKS Microfinance the continued development of the microfinance industry in organises prospective clients into groups so that they could India. The Reserve Bank of India (RBI), the Small Industries address the issue of information asymmetry and lack of Development Bank of India (SIDBI) and the National Bank collaterals by transferring what could be an individual for Agriculture and Rural Development (NABARD) are the liability to a group liability and holding the group morally largest and most active government affiliated entities responsible for repayment. Some of the other key factors regulating and supporting the industry. Collectively, these contributing to the health of its loan book are: organisations have initiated significant legislation and Credit is granted for productive purpose rather than funding with the intent to support the microfinance consumption, ensuring the generation of additional movement in India. Some of the measures include diversion income for borrowers and hence the repayment of loan. of credit to MFIs under priority sector targets for banks, initial funding from SIDBI among others. The low income nature of the customer segment is not as exposed to economic downturns and fluctuations ...leading to rapid balance sheet growth because it is relatively insulated from the general SKS Microfinance is amongst the fastest growing MFIs in economy of the country. This independence, or economic the world and ranked number nine in the top 100 MFIs detachment, from the effects of the economy ensures globally (source MIX). The company has scaled up its loan higher repayment rates. book from around Rs271 crore in 2007 to Rs2,827 crore by September 2009. The growth rate should remain robust in SKS Microfinance lends to only women as they are light of the existing demand-supply mismatch coupled with generally more risk averse, co-operate better in groups, low penetration of microfinance in the country. and are generally more accessible than their working husbands and can meet regularly to handle the repayment Trend in growth of their loans. 8000 2005 2006 2007 2008 2009 2010 Peer pressure mechanism through group lending (as 7000 discussed above). 6000 5000 Asset quality: a peer comparison CAGR 139% CAGR 165% 1.80% 1.65% 4000 PA R>30 1.55% 1.60% 3000 1.40% CAGR 139% 2000 1.20% 1.00% 1000 0.80% 0 0.60% 0.34% 0.39% Braches Clients ('000s) Loans outstanding Rs Cr 0.40% 0.29% 0.20% 0.20% 0.11% Group lending: Key to success 0.00% GFSPL Spandana SKS Share Mfn South Asia Basix Average The credit disbursement is done under group lending model Average India to provide unsecured loans to borrowers. The group lending model ensures that individual members are prudent in Source: MIX Sharekhan 3 July 2010
  4. 4. sharekhan ipo flash SKS Microfinance Superior returns Pradesh contributing a maximum of 28.8% of its outstanding The pricing power due to the demand-supply mismatch, loan portfolio as on September 30, 2009. Its diversified the benefits of scale and an effective business model (from geographical presence allows it to derisk itself from local the asset quality perspective) have culminated into superior economic slowdowns and political uncertainties. return on assets (RoA). For FY2009, SKS Microfinance Apart from a diversified geographical presence, SKS reported a return on risk assets (RoRA) of 4.57% with the Microfinance also has a diversified product offering. In gross yield as high as 31.6%. The RoRA of 4.57% is quite addition to loans the company offers insurance products superior compared with the RoA of banks (1-2%). Despite and productivity loans (ie loans designed for purchase of the robust RoRA, the return on equity (RoE) is in line with goods that enhance the productivity of members). A that seen in the banking space, due to frequent capital diversified product basket allows the company to increase raising and lower leverage. its revenue stream and create brand loyalty amongst RoRA break-up for FY2009 members. Even within loans, the activities for which loans 35 are given are diversified, thus mitigating the risk to any 30 particular sector. 25 11.09 Break-up of loan portfolio by economic activity 20 Other economic Productivity 15 31.59 loans 12.66 activities 12% 2% Trade 10 0.77 A gri related 4% 30% 5 2.5 4.57 Production 0 9% Gross Financial Opex Loan loss Taxes Return on Yield Costs Risk assets Trend in return ratios Services Livestock 21% 22% 25% 6.00% Return on Equity Return on Asset RHS 5.00% 20% Leveraging the geographical reach 4.00% SKS Microfinance has built a large distribution network in 15% 3.00% rural India that can be leveraged to distribute financial 10% products of the other institutions. Currently, SKS 2.00% Microfinance has a distributor relationship with Bajaj Allianz 5% 1.00% Life Insurance for the sale of the latter’s life insurance 0% 0.00% products. The stable fee income lowers the revenue risk FY07 FY08 FY09 FY10 exposure to longer-term interest income based products. Diversification of geography and products Adequately capitalised SKS Microfinance has a diversified geographical presence As per the RBI mandate, SKS Microfinance is required to spread across 18 states and one union territory with Andhra maintain a minimum capital adequacy ratio (CAR) of 12%. The company with a CAR of 24.4% is well above the RBI Geographical break-up of loan portfolio requirement. Chhattisgarh 1.7% Haryana Trend in capital adequacy Jharkhand Kerala 0.6% 1.9% Delhi 1.8% 45.0% Gujarat 0.6% Uttaranchal 40.0% 2.4% 0.4% 35.0% Uttar Pradesh Others 3.2% 0.1% 30.0% Rajasthan 25.0% 3.5% Andhra Pradesh 28.8% 20.0% Madhya Pradesh 15.0% 5.3% 10.0% Bihar 5.0% 6.8% 0.0% Maharashtra West Bengal Orissa FY07 FY08 FY09 H2FY10 7.4% Karnataka 13.8% 10.7% CAR Mandatory CAR -Mar'11 Mandatory CAR 11.0% Sharekhan 4 July 2010
  5. 5. sharekhan ipo flash SKS Microfinance Risks & concerns assigned. Though the assigned loans, in absolute terms Geographical concentration: Despite increased efforts by and relative to loans outstanding, have dipped significantly the MFIs in general and by SKS Microfinance in specific, a in FY2010, a return to previous levels could increase the major part of the microfinance business remains off balance sheet risks for SKS. concentrated in southern India. This concentration of loan Trend in loans assigned exposure to certain states increases the risk to the 120.0% company’s asset quality. Moreover, with too many MFIs Loans assigned to gross loans operating in these states, the borrowers may over-leverage 100.0% by borrowing from multiple MFIs, thereby increasing the 80.0% risk of defaults. 60.0% Equity dilution: In light of the scorching pace of the growth 40.0% in its balance sheet, SKS Microfinance has raised equity at 20.0% regular intervals (it has carried out capital infusion every 0.0% year since FY2006) which has contained the RoE. Though FY08 FY09 H1FY10 the company has headroom to fund its balance sheet growth by optimally leveraging the equity, regular equity dilutions ALM mismatch: SKS Microfinance maintains a medium- to may continue to contain the RoE. This, in turn, would act long-term borrowing profile, against which its lending as a cap on the valuations. maturity is within one year. This creates a significant asset liability mismatch and exposes the company to interest rate Unseasoned portfolio: MAlthough more than 99% of the risk. portfolio (based on SKS Microfinance’s internal classification) has been standard for the past two years. Asset Liability mismatch However, it should be noted that the loan portfolio has 10,000 Assets less Liabilities moderate seasoning in view of the three years’ track record 8,000 and therapid growth in the portfolio, hence its performance 6,000 over a longer economic cycle is yet to be seen. 4,000 2,000 Political risk: A possible political intervention remains the 0 -2,000 0-30 31-90 91-180 181-365 >365 single largest risk for the MFIs in India. A case in point -4,000 would be the loan waiver scheme announced by the -6,000 Government of India providing relief to small and marginal -8,000 farmers from loan obligations towards banks. With the low- -10,000 income segment being a major vote bank, such political intervention could have significant financial implications Points to ponder for the domestic MFIs. Management cashing out: Corporate governance has been an area of concern for MFIs in general. Based on the details Regulatory risk: Currently, NABARD holds the right of in the DRHP, it seems that the key people in the top regulatory oversight over the MFIs (except the non-banking management have decided to cash out in the run-up to the finance companies [NBFCs]). However, there exists a IPO by selling all or major part of their allotments under significant regulatory risk as the government may create a both the stock option and stock purchase plans at a separate regulator for all the MFIs. More importantly, the significant premium. Collectively, the transactions high interest rates charges by the MFIs may attract (mentioned in the table below) would imply a sale of 1.42 regulatory actions from the government or regulators, which million shares (8.4% of the IPO size). Though the may have a material impact on the ability of the MFIs to transactions have been approved by the RBI and there is sustain high returns. nothing illegal about encashing investments, but it raises Off balance sheet risks: One of the sources of funding for a larger question of commitment on the eve of a public SKS Microfinance is through the assignment of loan pools issue. Another related fact is that of the total issue size of to commercial banks. Considering the commercial aspects 1.68 crore shares, a major part (55.7%) is offer for sale by of assignment, SKS Microfinance assigns such loans on a Sequoia Capital. “full recourse basis”, ie assuming all the risks of loans Sharekhan 5 July 2010
  6. 6. sharekhan ipo flash SKS Microfinance Sumary of transaction Large Indian NBFIs also have excellent management teams Person Designation Sale/Agreement to sale and sound systems, according to CRISIL Ratings (2009) Month Shares Price/share Mr Akula Promoter Feb-10 945,424 636.0 The Indian MFI market is significantly concentrated, and Mr Gurumani CEO Jan-10* 225,000 636.4 this trend is growing: the top five MFIs already account Mr Rao COO Jan-10* 62,500 636.7 for more than 60% of total clients and are leveraging Mr. S. Dilli Raj CFO Jan-10* 25,000 636.7 their scale and capital market access to grow at 2.5 times Other employees Jan-10* 160,000 636.7 the rate of the next 10 MFIs (according to M-CRIL 2009) * Agreement date for sale of shares to Tree Line Growth over profitability? High rewards: Another aspect pertaining to the corporate Clearly, the private equity investors are assigning more governance is the high remuneration offered to the current importance to income growth potential rather than RoEs chief executive officer (CEO) and managing director (MD; (as evident in the table below). However, it should be Mr Gurumani). Mr Gurumani is entitled to a consolidated remembered that this high pace income growth is result of salary of Rs15,000,000 per annum and a performance bonus higher than global median leverage and excess capital flows of Rs1,500,000 per annum with annual increments up to with increased business concentration in select regions of maximum of 100% with the board having the liberty to India. Moreover, number of clients does not necessarily approve any further increase over and above the 100%. In translate into growth in earnings or solid profitability. addition, Mr Gurumani was paid a one-time bonus of Rs10,000,000 in April 2009, barely five months after joining Country Median PBV Median RoE Median Income the company. In total, Mr Gurumani received Rs2.5 crore, growth which forms 2% of the total personnel expenses of SKS Bolivia 1.1 19.3 33.5 Microfinance for FY2009. Cambodia 1.9 28.5 26.4 India 5.9 16.1 121.9 Peer comparison Mongolia 2.1 18.7 28.0 Indian MFIs attract significant premium Nicaragua 1.3 29.1 20.3 Peru 1.2 21 30.1 Globally, valuations for microfinance companies have Tajikistan 1.4 3.3 89.0 continued to rise. MFIs in the private equity market traded Uganda 0.9 11.5 22.0 at a median of 2.1x book value—a 62% increase since 2007 Africa 1.6 8.1 22.3 that reflects sustained demand for microfinance equity. Asia 2.5 15.9 52.5 India in particular has been showing unusually high ECA 1.8 19.1 31.0 valuations, with large MFIs trading at nearly 6x their book LAC 1.3 20 25.5 value, or nearly 3x the global median. Source: CGAP Median Historical P/BV ‘Scarcity premium’ pricing positives Region 2005 2006 2007 2008 2009 SKS’s leadership position in microfinance, scorching growth Africa 0.9 1.2 1.6 1.8 NA rate, high yields and return ratios, enviable asset quality Asia 1.7 2.0 5.1 2.9 5.0 sets the company apart from traditional financial services ECA 1.8 1.3 1.0 2.1 2.2 companies. Moreover, SKS would be the only microfinance LAC 1.4 1.2 1.1 1.2 1.3 company with market cap of around $1.3-1.4 billion (at ECA = Eastern Europe and Central Asia; LAC = Latin America and Caribbean. upper and lower end of price band) available in the listed Source: CGAP space and is likely to command scarcity premium. The same Following could be the reasons for the steep premium is also reflected in the offer price. At the upper and the assigned to Indian MFIs: lower end of offer price, SKS is valued at 3.85x-4.2x its post issue book value which is comparable to premium Indian MFIs have enjoyed the world’s highest growth valuations commanded by leading bank (HDFC Bank trades rate in both assets and net income over last five years. at 4.2x its FY10 adjusted book value) and NBFCs (Shriram Transport Finance trades at 3.5x its FY10 adjusted book They have maintained excellent asset quality (2008 value). median PAR30 at 0.36% vs 2.98% globally for NBFIs) and a low-cost model, with a median efficiency ratio of 11% compared to 19.8% for NBFIs globally. Sharekhan 6 July 2010
  7. 7. sharekhan ipo flash SKS Microfinance Peer comparison Company Gross PAR>30 Yield on gross RoA RoE Operational Opex/assets loan portfolio (%) portfolio (nominal) (%) (%) Self Sufficiency (USD) (%) (%) (%) GFSPL 22,687,237 0.20 32 0.17 1.16 101.94 12.23 Spandana 245,209,050 0.11 31 6.9 51.2 166.29 5.97 SKS 278,710,715 0.34 36 3.7 19.0 128.53 10.62 South asia average 5117639 1.65 23 1.1 10.4 108.17 10.17 India average 5,940,731 0.39 25 2.2 15.0 112.83 8.58 Share Mfn 190,831,717 0.29 29 6.0 37.0 151.72 8.53 Basix 73,600,059 1.55 30 2.0 16.0 114.12 14.53 Financials Profit & Loss acctount Rs (cr) Balance sheet Rs (cr) Particulars FY06 FY07 FY08 FY09 H1FY10 Particulars FY06 FY07 FY08 FY09 H1FY10 Interest income 0.6 4.0 13.3 44.2 28.5 Sources of funds Other operating income 0.8 4.1 14.9 46.2 31.3 Shareholders funds 13.9 26.6 44.6 59.0 60.7 Income from operations 9.0 44.5 162.5 506.0 341.4 Reserves & surplus 1.7 44.8 167.7 605.9 710.0 Other income 1.0 1.2 7.5 48.0 43.3 Net worth 15.6 71.4 212.3 664.8 770.7 Total income 9.9 45.7 170.0 554.0 384.7 Loan funds 69.2 249.0 789.8 2136.6 2602.6 Interest expenses 2.6 13.1 52.2 174.8 114.5 Deferred tax liability 0.3 - - - - Other financial expenses 0.0 0.1 0.4 2.0 1.3 TOTAL 85.1 320.4 1002.1 2801.4 3373.3 Financial expenses 2.8 13.9 56.5 194.4 127.4 Application of funds Personnel expenses 2.8 13.0 47.8 137.7 94.6 Fixed assets 0.9 2.1 7.9 12.4 14.1 Operating and other expenses1.9 9.9 27.5 73.5 46.8 Gross block 1.0 3.7 12.3 25.1 30.4 Depreciation and 0.8 2.4 5.1 10.8 5.3 less: Accumulated Dep 0.1 1.6 4.8 12.7 16.4 amortisation Net block 0.9 2.1 7.5 12.4 14.1 Provisions and write offs 0.8 2.0 4.2 13.5 24.9 CWIP 0.0 0.0 0.4 0.0 0.0 Total expenditure 9.0 41.1 141.1 429.9 299.0 Intangible assets 4.0 3.1 6.6 6.6 6.1 PBT 2.9 4.5 28.9 124.1 85.7 Gross block 4.8 4.8 10.0 12.1 13.1 Tax Expenses 1.2 2.3 12.3 43.9 29.8 less: Accumulated Dep 0.8 1.7 3.6 6.6 8.1 Profit after tax 1.6 2.2 16.7 80.2 55.9 Net block 4.0 3.1 6.4 5.6 5.0 CWIP 0.0 0.1 0.2 1.0 1.1 Investment 0.9 0.9 4.2 8.0 Net current assets 80.2 314.3 986.7 2778.2 3345.0 TOTAL 85.1 320.4 1002.1 2801.4 3373.3 The "views" expressed in this report are our views only and have been arrived at after analysis of the public offering details. This is not a recommendation under our "Stock Idea" category. It may/may not be included in the Stock Idea by our analysts at a later date. Disclaimer This document has been prepared by Sharekhan Ltd. (SHAREKHAN). This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is from publicly available data like public offering. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. 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