Maintain ‘buy’ on SKS Microfinance (SKS) with a target price of Rs 743 a share.
At the current market price, the stock trades around a P/BV of 2.7x FY18e. At our target price, it would trade at a P/BV of 4.15x FY18e. We have valued the core business at R716 (P/BV of 4x FY16e) and the deferred tax assets at Rs 27 a share.
SKS is witnessing the benefits of an improved funding environment. Healthy disbursement, coupled with activation of inactive members across the country, will pave way for AUM growth at a CAGR of ~46% between FY15-FY18e.
SKS has been consolidating its branch network and employee strength; the operating leverage benefits will accrue as we expect growth to drive earnings in the next couple of years. Looking at the growth, coupled with improvement in return ratios, we believe the stock is at attractive valuations. The long-term loan (LTL) portfolio forms ~24% of the AUM. The increase in LTLs has led to an increase in the AUM growth-to-disbursement ratio from -1.7% in Q1FY15 to 26.3%. Across NBFC peers, barring Shriram City Union Finance, the duration of loan book has fallen on account of an increase in lending towards shorter-tenure assets; while SKS has been raising the asset tenure of its book through LTLs.