With the RBI about to award small bank licenses in the pursuit of its ‘financial inclusion’ agenda, we expect to see some microfinance institutions (MFIs) win banking licenses, and this could transform the sector. It could turn MFIs from providers of micro credit into multiproduct financial hubs serving the ecosystem of poor and underserviced communities.
We think SKS is a frontrunner for a license, and it would significantly enhance its growth potential and expand its addressable market.
Note also we are cutting our EPS estimate for FY16e as SKS has cut its interest rate on loans, increasing its competitiveness, leading to higher growth in the loan book from FY17.
Winning a license would significantly enhance SKS’s product profile, currently restricted to micro credits, potentially leading to exponential growth in its loan book. Also the licenses will eliminate issues to do with external influences in loan repayments, which have lead to defaults, and that would also enhance the growth rate in SKS’s microfinance book.
Over the period FY 15e-20e we forecast a 45% CAGR in itsloan book with no license, and around 62% with it. We do not expect huge cost increases from such a transformation either.
We value SKS at target price of R562, implying 5.5x FY16e BV and 4.1x FY17e BV. As we forecast no dividend this implies a TSR of 22.8%. Obtaining a small banking license would be a major catalyst for the stock, while political risk remains the biggest risk to our target price if it doesn’t get the banking license.