Initiate ‘buy’ coverage on SKS Microfinance with price target of R500 per share...
Initiate ‘buy’ coverage on SKS Microfinance with price target of R500 per share. Due to the strong growth potential and high ROE, SKS Microfinance is one of our preferred NBFC picks (the others are LIC Housing Finance and Shriram Transport Finance).
After consolidating over FY11-13, non-banking micro-finance companies (NBFC-MFIs) have resumed their growth trajectory, with loan growth of 40%+ in FY14 and H1 FY15. We expect low micro-finance penetration and a rising market share for NBFC-MFIs to support a loan CAGR of 25%+ for the sector over the medium term. SKS Microfinance is the second-largest NBFC-MFI by loan book (and the only listed micro-finance company), and has a diversified loan book and national presence. We expect a 32% CAGR in assets under management (AUM) over FY15-17.
We expect an FY15-17 operating expenses CAGR of only 19% for SKS, driven by higher efficiency. We estimate a tax rate of about 5% in FY15, rising to the minimum alternate tax rate (currently 21%) over FY16-19e. Despite the higher tax rate, we expect an FY15-17 EPS CAGR of 66% and forecast ROA/ROE to improve from 2.8%/16% in FY14 to 7.1%/24% in FY17.
The key risks to our view are adverse regulatory actions and political intervention. However, we believe the potential for adverse regulations such as those in Andhra Pradesh is low.