SKS, surprisingly, failed to secure a small bank licence even though all other large MFIs were successful.
It is an opportunity lost for SKS, butwe believe SKS’s MFI model remains robust though its competitors are now better positioned. Higher (54%) share of banks (i.e., MFI-turned banks) will over time reduce risk perception of the microfinance sector, indirectly benefitting SKS as well.
We are removing the option value of the bank that was earlier baked into our price target; we had earlier assigned a 40% probability for SKS getting a bank licence in our valuation model. We hence revise our price target of Rs 420 from Rs 580. At our price target, SKS will trade at 15X PER and 3.2X PBR FY2017E.
We do not find any risk to SKS’s long-term growth trajectory in the MFI format. SKS remains one of the best managed NBFCs in under our coverage. We continue to believe that SKS remains well positioned to deliver 40% loan book CAGR between FY2015 and FY2018E, thereby driving 33% EPS CAGR and 22-24% medium-term RoE.
SKS’s improving operating efficiency and lower residual risk to the microfinance model after the announcement on small banks provides an upside to our estimates. Our estimates for SKS remain unchanged. The microfinance business will now be dominated by small banks — players with similar operating structure of SKS but possessing the additional advantage of the banking format.
These MFIs will over time be better placed to lower interest rates. This, however, may not be a very crucial factor, in our view.