SKS Microfinance Ltd IPO Message Board (Page 39)

1st August, 2010.

The various comments on the SKS IPO, talk about the risk factors, but do not take head on the question whether the IPO is over priced. The price range is Rs.850/- to Rs.985/-for a Rs.10/- share. As between the year ending March 09 and the half year ending Sep.09., the profit after tax has only marginally improved from 14.22% to 14.53% of its income. This would imply perhaps that the EPS also remained static.

I have a suspicion that the pricing has been kept high, very high infact, to enable the promoters and existing investors including Mr.Narayana Murthy, to multiply the market value of their investment, rather than merely with the idea of roping in funds for expansion and such like activities. Or the often touted noble objective of making it possible for new investors to also participate in wealth generation. To explain further, Mr. Narayana Murthy who has purchased about 15% of the equity at Rs.300/- per share,in the fairly recent past, will find his investment vaultzing by over 3 times, giving him an advantage of several hundred crores, in just a matter of months!

Reminds me of the Reliance Power IPO, the then largest Indian IPO, a couple of years ago. Promoters including Mr.Anil Ambani, expected to see their investment @ Rs.17/- per share, waltzing to over Rs.900/-, the hyped forecast prior to its listing. They still made a killing, though the Reliance Power share tanked far less than the the Rs.430/- at which price millions of investors had subscribed. They lost heavily........the promoters yet made quasntum jump in their original investment which was @ Rs.17.00 per share.

I am therefore not surprised that even on the third day of the SKS IPO on 31st Jul. 10 and with just a day more for its closing, the non institutional investors portion is subscribed only to an extent of 0.13 times, and subscription for the retail portion is only a shade better at 0.16%.

Earlier, like many other retail investors, I was also planning to allocate a portion of my budget, to subscribe to the SKS IPO, but have now decided not to subscribe at all to it, but wait for its listing to decide on buying or not buying the shares.

The "sweat equity" concept introduced by Reliance makes it possible for promoters to own huge portion of promoters capiital even without investing any or barely investing money actually in the venture.

It is better for investors, especially retail investors, to analyse facts objectively before investing their hard earned money, in IPOs, or in the stock market per se.

hey guys it will subscibe nearly 5.65 times in retail,,,,sure remembar

Dear SKS,
agree with your point.QIB response is not the only valid point in going for an IPO.We have to check the fundamentals also & India bulls power ,Rpower etc scored a big zero on that.We have to take case by case basis of each IPO & decide accordingly.I feel you will get good profit at least till listing as tomorrow HNI portion will also get subscribed heavily & it will give boost to grey market trading.With comfort of 50 discount you can go for listing gains,this company is growing at such a pace that there is a lot of demand for the stock that is why these people abruptly changed the price band from 650-700 to the present case.

For the biggest MFI in India, concerns remain on credit costs and finacial leverage.

SKS has announced the final pricing range for its IPO at Rs850 to Rs 985 per share. We think these are punchy valuations even at the lower end implying a 5.8x FY10 P/B (pre money) and 3.8x FY10 P/B (post money). Whilst global microfinance peers tend to trade at a higher multiple, those have significantly higher return ratios (30-40%) compared to SKS’ FY10 RoE of 21%.

Clearly, the valuation factors in expectations of significant RoE expansion in the future to which we see challenges from : a) Competitive, political and regulatory risks to yields b) Credit costs already at a low of 0.5% to 1.5% in the past three years could rise c) Limited operational and financial leverage. Whilst we acknowledge SKS as a strong business exposed to a huge market opportunity, valuations do not factor in these risks.

SKS Microfinance is the biggest micro-finance institutions in India with 20% market share amongst organised players. Given that micro-finance institutions are currently catering to a mere ~8% of the potential market, there is a huge market waiting to be tapped.

However, increased competition, the possibility of regulatory and political interventions and lack of operating and financial leverage in the business model leaves little scope for return ratios to expand from here:

• Pressure on yields going forward: The yield on advances for SKS has been in the range of 25-28% over the last three years. However, the yields can come under pressure going forward as competition is rising with more players are entering the market (two prominent MFIs recently decreased their interest rates). Moreover, the authorities are not happy with high interest rates
charged by MFIs (25%-35%) and the possibility of the RBI or state governments capping the interest rates charged by MFIs cannot be ruled out.

• Credit quality can worsen: Whilst credit costs for SKS has been in the range of 0.5%-1.5% over last three years, it can deteriorate going forward to more than 2% due to: a) increased competition in the sector (multiple borrowings by clients beyond their repayment capacity); and b) expansion into new geographies. Globally, the average credit costs for the sector have been in 2%- 5% range. Moreover, the bigger risk for credit quality comes from instances of mass defaults (e.g. Kolar incident in India) which have plagued the microfinance industry the world over.

• Limited operational leverage in the model: Whilst cost to income ratio of SKs has come down from 79% in FY07 to 52% it is primarily driven by increased loan ticket size rather than operating leverage in the business model. Unless SKS increase its average ticket size per customer (which might have an adverse impact on credit quality), we do not see leverage economics working in SKS model because of large administrative and employee costs associated in reaching out to the customer base. A look at global microfinance companies show that cost to income ratio of these companies has been in the range of 45% to 55% (SKS is currently at 52%).

• Financial Leverage to remain low: Whilst the company management claims that it can leverage up to ~7.0x (currently at 3.8x) and hence enhance ROE to 40% going forward (currently at 21.5%). We are sceptical that company would be able to leverage more than 5x as regulators and bankers might not be comfortable with high leverage given the inherent risk in the business model.
Even globally micro finance companies have been leveraged less than 3x because of the higher capital adequacy required by regulators and bankers. Hence on a best case basis we do not see ROA for SKS going beyond 6% (from 5.4% in FY10) and ROE beyond 30%.

SKS MICROFINANCE IS SURELY A GOOD IPO.KINDLY LOOK AT THE 36 ANCHOR INVESTORS APPLYING FOR SHARES AT 985/PER SHARE.QIB PORTION HAS ALREADY SUBSCRIBED NEARLY 20 TIMES.CAPITAL MARKET HAS ASSIGNED 45 RATING.CARE HAS GIVEN 4/5 GRADE WHICH MEANS ABOVE AVERAGE FUNDAMENTALS.8 OUT OF 9 BROKERAGE HOUSES HAS ADVISED TO SUBSCRIBE THE ISSUE.

Saharanpuri...wait i will personally publish it tommorow and give you the report.....

By that time why dont you read the articles i just mentioned below they are excellent will clear some of doubts if you have...and will give u strong case to argue againsta anybody who does not believe in the sectors potential...

Meantime while you are reading these articles...i will keep giving u feelers about the report actually i got delivery on saturday..its 60 pages....i am still reading....will finish tommorow morning

Thanks SJ,

for your valuable inputs .

cud u please give synopsis of the latest report by intellcap

rgds

vivek

Dear Saharanpuri you are copy pasting risk factors...that are in every business

The person who wrote article referred to Intellcap agency..."A couple of weeks ago, I attended a very interesting roundtable on the risks landscape and outlook of the microfinance sector in India for 2009. It was organized by CGAP and Intellecap and held in Mumbai"

For your kind info

Intellcap has Published latest edition of their Microfinance oultook for 2010 callled: " Inverting the pyramid".....

Read its synopsis on their website . I have purchased their report....they predict 135000 crore loan disbursments from current 45000 crore till 2014...

That is CAGR of 50% for next 4 years....!!

551 IPO FINDER SAHI KAHTA HAI.

INVESTORS JAAGO VARNA SKS*** HO JAYEGA

SKS*** = SUB KUCH SAAF

Hi Guys,

I have a lot of respect for Gem IPO finder and Sreedhar. I think they are the most intelligent persons in this forum.

I will also like to add another point
Although the recent history says that if a unique business is listed, the market is always ready to pay high valuations

Examples are Jubliant, ARSS, Talwalkars

But please don't forget these all issues were less than 200-300 crores. also the allotment for retailers was also very very less.that's why they are still enjoying the high prices, despite of high P/E

In SKS the size of IPO is so high 1700 crore which makes the mind doubtful, also the price band is very high.
So the chances of allotment to the retailer will be very high.
and according to the strategy of Gem IPO Finder(I read it in his previous posts that he is successful in IPO becoz he never applies in the IPO where chances of allotment to retailer is so high)Here we all know that it will not go more than 2-3 times in retail.

Also we have another better IPO available i.e. Bajaj Corp.
Then why should we take such a big risk .

Current GMP
EIL:- 7 Rs premium
SKS :- Kostak 2200 share 65 -67 Rs
Bajaj:- share 125 Rs, Kostak 2100

Moral:- To preserve capital is more important as compared to make profits.

In SKS chances of capital losing are very high becoz shares have been alloted in price of 50 Rs then 300 Rs then 630 Rs.

If the pre investors are confident abt such a high growth then why are they selling their entire stake.

My mind says if anything has so much If and buts then better to avoid that instead of taking high tensions
Apply only if u can sell it in grey market.

AFTER LISTING INVESTORS WILL SING:

GHAATAA LAGAAA... HAI LAGAAA..

DEAR SAHARANPURI, AFTER LONG I COME ACROSS WITH SUCH ANALYSIS WHICH IS VERY USEFUL IN TAKING CORRECT DECESIONS AND THE RISK WE ARE TAKING. BUT I DON'T KNOW HOU MANY WILL UTILISE YOUR ANALYSIS. IN THIS COLUMN OF LATE, I HAVE BEEN COMING ACROSS SO MANY SO CALLED IPO RAJAS/RANIS/IPO EXPERTS/IPO KINGS AND QUEENS, WHO ARE WRITING CHEAP THINGS AND GOSSIPS ETC. AFTER A LONG TIME, YOUR BOTH THE MESSAGES FELT ME THAT I AM READING FINANCIAL PAPER. KEEP IT UP. GIVE SUCH TO EACH AND EVERY IPO. GIVE FACTS ONLY NOT RUMORS. THANKS. KUMAR

AISA LOSS LAGEGA JO NA AB BHAREGA
HAR FINANCE IPO SE AB YEH DIL DAREGA
HUM TO LOSS KHA KE YOUN HI MAR MITE THE
KAUN TUMHARE PREMIUM PE ITNA BHAREGA

Risks Facing Indian Microfinance Companies and equity valuation of Microfinance Companies

By Xavier Reille who leads the CGAP’s Transparency Team
A couple of weeks ago, I attended a very interesting roundtable on the risks landscape and outlook of the microfinance sector in India for 2009. It was organized by CGAP and Intellecap and held in Mumbai. This was my first visit to India in 21 years, and it was a unique opportunity to discover the microfinance scene.


I was particularly interested in Intellecap’s December 2008 survey on the major risks facing the commercial microfinance sector in India. Overall, liquidity risks ranked first, over indebtedness due to multiple borrowing was second, and high cost of debts came in third. Investors and lenders emphasize internal risks (inadequacies of internal control, fast growth), and CEOs of MFIs emphasize external risks (refunding risk mainly)—a key risk to watch in the short term.


Why do CEOs of MFIs see over indebtedness as one of their main worries? India is definitely a large and young market, but MFI CEOs seem to be increasingly worried about the level of competition and indebtedness of their clients. Over indebtedness does not necessarily translate into credit risk because clients might need to borrow from several sources to get higher loans to fund their business. However, it is a source of concern in an environment without a credit information system, and it might be an early warning of upcoming credit risk. High-growth MFIs with substandard loan underwriting processes,and lax group formation and training policies may be particularly vulnerable, as we have seen in Morocco. This is definitely another topic to watch in 2009.

I didn’t have a chance to discuss the topic with commercial MFI CEOs but was surprised by the importance of group lending in India. While group lending is a good entry product, it has also shown several limitations in other markets. I would be like to learn more about MFI risk management techniques for group lending and product diversification plans.

Finally, I was not able to crack the equity valuation mystery. According to a soon-to-be-released survey conducted by CGAP and J.P. Morgan, the median price for private transactions is 1.9x book, but Indian MFIs are trading at 6x book value, 3 times more than the market median. What can justify such high valuation? While MFIs offer high growth potential, first-class management and systems, and attractive opportunities for IPOs on the local market, the earning prospects alone can’t justify such a level of valuation. Are MFI distribution platforms strategic acquisition targets for large equity investors ?

PROSPECTS AE NOT VERY ROSY FOR INDIAN MICROFIS
Synopsis
The past year held many challenges for microfinance: not since the Asian crisis of the late 1990s has the sector faced a more difficult economic environment. Yet despite these conditions, most microfinance institutions (MFIs) proved to be up to the challenge.

cgap All Eyes on Asset Quality: Microfinance Global Valuation Survey 2010 CGAP
Beginning in January 2009, MFI portfolio delinquency levels began to deteriorate rapidly, with loans past due over 30 days (portfolio at risk [PAR30]) jumping from a median of 2.2 percent to 4.7 percent during the first five months of 2009, while profitability dropped from a median return on equity (ROE) of nearly 18 percent at year-end 2008 to 6 percent by May 2009. However, since June 2009 delinquency has moderated and profitability levels have come back to stabilize at 4 percent for PAR30 and 10 percent for ROE, respectively. Most MFIs continue to maintain solid reserve and capitalization levels, with equity ratios unchanged from the 18–20 percent range established over the past two years.

The effects of the downturn were also far from uniform. While Central America, Eastern Europe, and Central Asia were particularly hard hit, large areas in South America and South Asia have witnessed little or no impact. At the same time, a few countries (Nicaragua, Bosnia and Herzegovina, and Morocco) have experienced severe delinquency crises but for reasons not directly related to the global downturn.
Summarizing few points made in the report and some commentary

Valuations

* MFI valuations are on the rise across the globe however there is still no established relationship between ROE and P/BV, suggesting an immature market.
* Key valuation drivers are identified as asset quality, net income growth (not discounting for equity dilution) & age.
* Valuations in India remain the highest in the world at 5.9 BV (ROE of 14%) – despite 30% of the deals tracked for the study being from India. However whether these valuation are hyped-up or fairly valued is not discussed.
* Indian valuations are driven by high market potential (in spite of high historical growth), low costs, good asset quality, mature systems & processes.
* Some contradictions while expressing concerns over Indian valuations:

1. Using average ratios to say that profitability etc is not high enough for a 5x valuation even when average MFIs are not the ones getting these kind of aggressive valuations
2. Expect that geographic expansion will bring down profitability going forward although geographically dispersed have managed to stay profitable by charging higher rates
3. Expecting asset quality to fall even when sector wide intervention in India like credit bureau are acknowledged

Profitability

* Profitability seems to have begun declining in early 2007 and made more rapid post September 2008. Globally, MFI profitability has dropped from a median of 18% in May’08 to 6% in May’09 however India is still at 14.2%
* While most countries have sufficient equity cushion, abnormally high leverage in India make it more exposed to both systematic risks & shocks
* Rapid decline in median profitability (ROA / ROE) mirrors increase in PAR for Sym 50 data (Sym 50 index has no representation from S Asia or Africa)

Asset Quality

* While large MFI’s remain well capitalized to ensure capital security due to increasing PAR, the lesser ones hold no such promise
* Globally asset quality has fallen – PAR 30 at 4.7% – admittedly their data for South Asia is limited on this, and asset quality in India, Bolivia, Egypt & Kosovo have not followed this trend
* The group lending portfolio (compared to individual lending) of Compartamos did better than the rest of its portfolio showing almost no impact of the crisis
* Delinquencies have been worst in Nicaragua, Morocco, Bosnia & Herzegovina not only due to financial crisis but also due to unhealthy competition, loss in credit discipline. Indian MFI’s are taking preventive action in terms of self regulation, setting up a credit bureau, etc (both and enterprise and sector level).
* The worst seems to be over with PAR 30 falling back down however inefficient processes of weaker MFI’s were exposed leaving them with higher delinquent portfolios and unnecessary equity dilution in certain cases.

Future trends for Indian MFI’s

* In Latin America – Peru, Ecuador, Mexico etc, banks have made strategic MFI acquisitions indicating future possibility for Indian MFI’s.
* The introduction of comparison of LIFI with large average ticket size portfolios (for e.g. financing tractors and farm equipment) of MFIs like Spandana is more adequate given a more representative risk profile. Recent trends indicate top 5 MFIs in India becoming LIFI’s driving valuations higher for investors.
* Microfinance in India has been decoupled from the global financial markets compared to likes of Mongolia, Peru & Nicaragua perhaps indicating the increasingly lack of correlation between microfinance industry with regular financial markets in a country as it matures in age and asset quality.
* Overvaluation in Indian MFI’s is driven by excess capital from those expecting quick exits alluding to a possible bubble driven by driven credit liquidity.



O

SKS AAPLOGO KO KHARAB KYON LAG RAHA HAI???????? KOI SPESIFIC ANSWERS DEGA MUJHE ..PLZ...>>> KYUNKI MAIN ISME JYADA INVEST KARNE KI SOCH RAHA THA>>>>

544 NO. MESSAGE MERA NAHI HAIN.

544 MO MEASSAGE IS NOT MINE.

SOME BODY IS USING MY NAME.

@IPO EXPERT CA PALI

Thank you for your comments..I appreciateit....

bUT DEAR....nobodyis fighting..we all are debating...nothing wrong with that..that only enhances ones ideas...and knowledge.....!!

SUB KUCH SAF =====SKS========
SKS MICRO... ME SAB KAHTE HAI K ACHHA GAIN MILEGA LIKIN ME KAHTA HU IS IPO ME GAIN NAHI MILEGA Q K NHPC, R.POWER, ETC ME SABHI LOG YAHI KAHTE THE OR JO HUWA WO SAB K SAMNE HAI,
NHPC OR R.POWER ABHI BHI ISSUE PRICE SE NICHE TREDE KAR RAHE HAI,
MERA YE MANNA HAI KI IS IPO KO AVOID KARO YA SELL KAR K PROFIT KAMAO.......
................THINK ABOUT IT......................

@ BOLO TARA RA RA...

Exacltly Indiabulls finance mein acha return diya...woh company chalu hui ek chote kamre se aur aaj itni badi ho gayi hai ....pur jub woh indiabulls power laye...to unke paas koi fundamental nahi te support karne ke liye.....tabhi to flop hua....aur power sector ki companiyan waise bhi low valuation ki hoti hain aap ntpc...ko dekh lein...yeh agar high valuation....pe ayi to pitni hi thi...na....power sector ki value hi itni hai....

300 par Narayan murthy ko fiya tha january 2010 mein..aap sks ke annual report mein jaiye...aur wahan pe..uska..date of transaction dekhiye with NARAYAN MURTHY'S...CATARMAN...us samay...300 ke daam mein latest quarter ..yane ke sep 2009 ke result ke upar...PE 22 ka tha....us samay woh bhi costly tha....phir march 2010 mein uski valuation 600 ki thi....toh GEORGE SOROS KO 650 MEIN DIYA...USNE CRORON RUPYEE LAGAYE....WOH BHI UNLISTED COMPANY MEIN...USKO KYA ACHEY DAAM PAR NAHIN DEGI COMPANY..?.....

Aur market mein koi bhi share current value pe nahi bikta sirji..future pe bikta hai..aur future yaani ke 2011 uska EPS Hoga estimate ke hisab se....46-50 EPS...TOH PHIR 985 DAAM PAR PE to sirf 16-18 ka hi...

Jub itna saal performance dikhayi hai to aage bhi dikhayegi...Yeh sector ka hi itna potential..hai....Agar aap ko lagta HAI KI MICROFINANCE SECTOR HAI BAKWAS HAI YAH USME HIGH GROWTH NAHI....NAHI...HAI..MAINE JO RESEARCH KE LINKS DIYEN HAI PICHLI POSTS PUR .....TUB BHI NAHI....TOH PHIR AAP NIVESH NAA Karein....Kyunki agar aap...pricing peh comfortable nahin hain....tub phir matlab hi nahi....apna decision khudh lijiye..