Espirito Santo: SKS Microfinance (Buy, FV240):
SKS Microfinance reported its numbers, another very strong quarter with the loan book increasing by 17% on QoQ basis and profits moving up c.30% on QoQ basis. The portfolio showed no signs of stress, we think that the company is moving in the right direction. Key highlights of the results are:
a) Loan book growth remained very strong with the loan book growing by 17% on QoQ basis and 58% on YoY basis the company on track to meet its guidance of 2800-3000cr (40%-50% up on YoY basis) of portfolio for FY14. The company disbursed 1400 crores in Q3 almost 80% up on YoY basis.
b) Credit quality was really strong with the company showing almost 100% collection efficiency in its Non AP portfolio.
c) Operating leverage starting to play out with the loan book growing but opex remaining at 60crores per quarter.
Our view: We have been buyers of the stock with a valuation of Rs.240 given that we expect the company to more than double its profitability between FY14E and FY15E, given that we expect the company to show c.40% loan book growth in FY14 and c.40% loan book growth in FY15. We think that the company is on track to achieve the management guidance of 2800-3000 crores of loan book and our PAT expectation of c.75 crores for the year.
Antique Stock Broking: SKS Microfinance - Embarking on the growth path (BUY)
After a long period of consolidation, SKS Microfinance is back on the growth path with it AUMs (ex-Andhra) growing 17% sequentially to Rs 23.6 bn as on quarter ended December 2013. Given the back-ended nature of growth as well as securitization in Q3FY14, NII declined 3% QoQ to Rs 573 mn. The company maintained a tight leash on operating costs with no increase in branch network as well as employee count, thus enabling stable costs despite the strong growth. Recoveries at ~Rs 50 mn were strong (possibly from Andhra Pradesh) and aided 31% sequential improvement in earnings to INR214m. Borrowing environment remained benign as the company securitized ~Rs 3.5 bn over Q3FY14.
Stable regulatory environment, overhauled processes and reduced competitive fervor have improved the risk perception of MFI sector over past few quarters. Funding environment continues to improve and disbursement CAGR of 36% will drive AUM CAGR of 36% over FY14-16E. Operating leverage benefits will continue to accrue as growth accelerates propelling earnings CAGR of 76% over FY14-16E.
We maintain BUY with twelve month price target of Rs 228/share, which implies an upside of 34%. We value the core business at Rs 199/ share (8.5x FY16e earnings) and the DTA at Rs 29/share. Another Andhra Pradesh like event remains the key risk, which gets completely mitigate once the MFI Bill 2012 get passed.
Growth kick-starts, funding environment benign
Drawdowns for 9MFY14 at Rs 17.9 bn were 53% higher than 9MFY13 levels. SKS completed securitization transactions to the tune of Rs 6.7 bn over 9MFY14. SKS kick started growth through a combination of reaching out to new borrowers as well as lending higher amounts to existing borrowers (avg. outstanding per borrower improved from Rs 7,244 to Rs 7,775). Leadership position across India coupled with expanding borrower base will enable 36% AUM CAGR over FY14 16e
Gains from improved efficiency to accrue soon
Average loan book per loan officer improved sharply from Rs 4.2 mn in Q2FY14 to Rs 4.9 mn in Q3FY14. Given the tight leash on branch network expansion and employee additions, we expect cost-to-income ratio to improve from the current 75% levels to 55% over the next five quarters. This will drive pre-provisioning profit CAGR of 86% over FY14-16E.
Earnings recovery to sustain, maintain BUY
Stable regulatory framework and robust processes has enabled collection efficiencies for 99.5%+ over the past four quarters. This coupled with the policy of lower exposure to risky states and well defined concentration norms will ensure lower credit costs over FY14-16e. We expect earnings CARG of 76% over FY14-16E driven by robust AUM growth, gains from operating efficiency and low tax rates. MAT @ 21% will kick in late FY15, post which SKS would generate RoAUMs of ~4% and RoEs of ~24% on a long term basis.