SKS Microfinance Ltd IPO Message Board (Page 49)

A Company which gives loan to poor widows, farmers, villagers at 40%, can you think that it will allot you shares cheaper. no way, it will try to give you shares at maximum possible rates. you will nefer find these prices post listing

Cost to Promotors = less than rs. 50 per share
cost to pre ipo investors = rs. 300 per share
ipo price for investors = rs. 985 (sorry 935 because there is a hugh discount of rs. 50)

Company ne itna bada discount de diya hai. main to jaroor apply kaoonga. Kitni acchi company hai. bahut achhi growth hai.

kya farak padata hai agar share thoda mehanga hai toh. 200-400 rs. discount bhi ho gaya toh koi baat nahin, mujhe to saari compnaies waise bhi lootati hai thoda aur ghata lag jayega.

apply to main jaroor karoonga, because i am IPO ADDICT.

IPO- MERA NASHA HAI.

IPO ANALYSIS: SKS MICROFINANCE LIMITED – MODERN DAY SHYLOCK – AVOID



Andhra Pradesh government cracks down on predatory practices of Microfinance Institutions
The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.
IPO ANALYSIS:

The ultimate goal of microfinance is to enable the poor to build assets, increase incomes, reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and healthcare. The microfinance industry has grown at a rapid pace across the world and has created a positive impact in the lives of millions of poor people.

The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. The borrowers pay exorbitant rate of interest. Most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.

Micro finance should not be viewed as a business venture where one can expect very high return on investments. Governmental and statutory regulations, including the imposition of an interest-rate ceiling, are bound to happen. This will adversely affect the operating results. More importantly, the sector, which sucks the blood of the poorest of the poor, (very high interest rates) does not deserve any support. The IPOS will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. And the hapless borrowers continue to live in abject poverty. It is time that the regulators look into this ugly side of micro financing.

Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements. Such dependence in the case of marginal farmers, landless laborers, and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks.
Micro finance is the provision of financial services to low income clients, including consumers and the self employed that traditionally lack access to banking and related services. It is a movement whose object is to create a platform, for as many poor and near poor as possible, to have permanent access to an appropriate range of high quality financial services, including savings, insurance and fund transfers, at an affordable cost. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.

In 1994, the RBI constituted a Working Group on NGOs and Self Help Groups (SHG). On the recommendations of the Group, the Reserve Bank advised that the banks’ financing of SHG should be reckoned as part of their lending to weaker sections and such lending should be reviewed by banks at regular intervals. As a follow up of these commendations, the RBI took a series of measures in April 1996 to give a thrust to micro-finance based lending. Currently, all loans by banks to MFIs are categorized as priority sector lending, that banks have to fulfill as part of their social obligation and regulatory requirement.

Usurious rate
The interest rate applicable to loans given by banks to micro-credit organizations or by the micro-credit organizations to Self Help Groups/member beneficiaries is left to their discretion. Since the advances to MFIs are classifieds as priority sector advances, the applicable interest rate is around 15%p.a. However, the MFIs are collecting interest between 24% to 36% p.a. from the hapless borrowers. The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. Micro finance should not be viewed as a business venture where one can expect very high return on investments. RBI should put a cap on the interest to be charged on the end users, as most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
The RBI should also exercise greater control over MFIs, bring more transparency in their operations and derecognize the MFIs, which are known for bad corporate governance.
RISKS / MATTERS OF CONCERN:

SKS has limited operating history and the fast growing and rapidly evolving business make it difficult to evaluate the business and future operating results.

The company has no dividend history.

The report of the audited financial statements for the year ended March 31, 2009 records statements that there were delays in the deposit of undisputed statutory dues to appropriate authorities and there were instances of fraud on the Company by employees.

Governmental and statutory regulations, including the imposition of an interest-rate ceiling, may adversely affect the operating results.

RECOMMENDATIONS

The promoters/share holders are being profited at the cost of the hapless poor, down trodden and other weaker sections of the society. Unethical and unsustainable business model. The initiatives taken by the Public Sector Banks – for financial inclusion will make the presence of MFIs in rural areas irrelevant in the next couple of years. Even otherwise government will not be a mute spectator to the exploitation. Government is bound to regulate the interest rate in favor of the beneficiaries, which will make these kind MFIs redundant. AVOID

DEAR ALL,
CAN ANYONE GUESS....HOW MANY TIMES SKS MICROFINANCE WILL BE SUBSCRIBE IN RETAIL?

TAHNK YOU.
PLZ GUIDE.

MUMBAI: According to Jaypee Capital, the initial public offering of SKS Microfinance is overpriced. It has advised investors to ‘Avoid’ the issue
and invest in the stock post listing.

“At the lower price band, the stock is priced at 35x trailing FY10 EPS and 6.4x post issue book value. This, we believe is expensive, compared to Global MFIs which are trading in the range of 3.5-4.5x their book value.

Though the company has a very robust business model, strong margin profile and return ratios and low NPA’s, we believe the issue is overpriced and suggest investing after the stock lists. We recommend “Avoid” on the stock,” the report said.

SKS Microfinance has entered the capital market to offer 16,791,579 shares in the price-band of Rs 850-985 per share. It plans to utilise the proceeds to augment capital base to meet future capital requirements and to achieve the benefits of listing on the stock exchanges. The issue closes Monday.

SKS Microfinance: An IPO at a PE multiple of 50 reminds one of the era of tech boom
July 28, 2010



There are other issues like commitment of the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities

The much talked about initial public offering (IPO) of India's largest microfinance lender, SKS Microfinance Ltd, hits the capital market today with a price band of Rs850 to Rs985 per share. The issue closes on 2 August 2010. The issue opened for subscription yesterday for anchor investors. SKS is issuing 1.67 crore equity shares of Rs10 each.

With earnings per share (EPS) of Rs32.98 as on 31 March 2010, SKS trades at price earnings ratio of 26 at the lower band and 30 at the upper band. The issue consists of a fresh issue of 74.45 lakh shares with 50.37 lakh shares reserved for retail investors. Qualified Institutional Buyers (QIBs) will be allotted one crore shares. The company is expecting to raise Rs1,427 crore-Rs1,654 crore through this IPO.

Financials and other information provided by SKS appear good on paper. However, there are some issues with the company, like high valuation of the IPO, question of commitment from the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities.

At the upper price band of Rs985, the company is demanding a valuation of almost 50 times its FY10 earnings. For a non-banking financial company (NBFC), which has a limited period of operational history and no dividend record, the valuation looks very much stressed.

Although the company in its draft red herring prospectus (DRHP) claims that it has no competitive peers, SE Investments Ltd, a microfinance lender, is already listed on the Bombay Stock Exchange (BSE). SE Investments' EPS stands at Rs1.21 in the first quarter of FY10. The company posted a net profit of Rs17 crore. Based on the EPS of the first quarter of FY10, its P/E works out to 11 (annualised), which is lower than the PE of SKS.

SKS reported a net profit of Rs174.8 crore on total revenues of Rs958.9 crore and an operating revenue of Rs873.50 crore for the year ended 31 March 2010. It had a negative cash flow of Rs541.20 crore for the year ended March 2010.

According to the DRHP, the key management of SKS Microfinance has decided to sell their stake in the run-up to the IPO under both stock option and stock purchase plans at a significant premium. Collectively, the transactions would imply a sale of 1.42 million shares or 8.4% of the IPO size. Although the Reserve Bank of India (RBI) has approved the transactions and there is nothing illegal about en-cashing investments, this raises a larger question of commitment on the eve of an IPO.

Another related fact is that out of the total issue size of 1.68 crore shares, more than half or 55.7% shares are put on sale by Sequoia Capital.

According to KA Prasanna of firstchoiceipoanalysis.com, the IPO of SKS Microfinance will make the promoters, and other venture capitalists including some private equity funds that have stakes in these companies, millionaires. The hapless borrowers continue to live in abject poverty, he added. Earlier in February, SKS Microfinance's founder and chairman Dr Vikram Akula sold 9.45 lakh shares at Rs639 per share to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million, Mr Prasanna added.

SKS Microfinance also offers high remuneration to its top management. Its chief executive and managing director, Suresh Gurumani, is entitled to a consolidated salary of Rs1.5 crore per annum, besides a performance bonus of Rs15 lakh per year, with annual increments up to maximum of 100% with the board having the liberty to approve any further increase over and above the 100%. Another shocking part is that Mr Gurumani was paid a one-time bonus of Rs1 crore in April 2009, barely five months after joining the company.

SKS Microfinance maintains a medium- to long-term borrowing profile, against which its lending maturity is within one year. This creates a significant asset-liability mismatch and exposes the company to interest rate risk.

SKS has expanded its membership to 6.8 lakh across 19 States during FY10 from 2.02 lakh in five States from FY06. Currently the company has 2,029 branches with total outstanding loans worth Rs2,936.70 crore as on 31 March 2010. During the same period, its debt to equity ratio stood at 2.84:1 with net non-performing assets (NPAs) of Rs4.8 crore or 0.16% of outstanding loans.



SKS provides small loans exclusively to poor women located in rural areas across India. The loans extended are purely for business and other income-generating activities and not for personal consumption. The company will use the IPO money to meet future capital requirements.

With increased area of operation and scaled-up activities, microfinance is increasingly gaining credibility in the mainstream finance industry with many traditional large finance organisations contemplating a foray into this business. From the geographical perspective, microfinance activity has traditionally been concentrated in southern India as 57% of the microfinance institutions (MFIs) and about 71% of the microfinance borrowers of the country are from this region.

Currently, the National Bank for Agriculture and Rural Development (NABARD) holds the right of regulatory oversight over MFIs except NBFCs. However, there exists a significant regulatory risk as the government may create a separate regulator for all MFIs. More importantly, the high interest rates charges by these MFIs may attract regulatory actions from the government or regulators, which may have a material impact on the ability of these institutions to sustain high returns. For the year to end-March, SKS charged an interest rate ranging from 26.7% to 31.4% to its customers.


Recent rules require NBFCs to maintain a capital adequacy ratio of at least 12% by 31 March 2010 and 15% by March next year. SKS' capital adequacy ratio was much higher at 28.3% as on 31 March 2010.

Kotak Mahindra Capital Co Ltd, Citigroup Global Markets India Pvt Ltd and Credit Suisse Securities (India) Pvt Ltd are the lead book running managers to the issue.

Rating agency CARE has assigned an 'IPO Grade 4' to the SKS IPO indicating 'Above Average' fundamentals.

Background

Swayam Krishi Sangam (SKS) Society, a non-profit, non-government organisation (NGO), converted itself into SKS Microfinance, a non-banking financial company-non deposit taking (NBFC-ND) in 2005. Later in 2009, SKS Microfinance became a public limited entity from a private limited company. In addition to loans the company offers insurance products and productivity loans or loans designed for purchase of goods that enhance the productivity of members. SKS Microfinance has a tie-up with Bajaj Allianz Life Insurance Co Ltd and as of March 2010, had sold 2.9 million insurance policies.



SKS uses a village-centred, group-lending model to provide unsecured loans to its members. SKS Microfinance organises prospective clients into groups so that they can address the issue of information asymmetry and lack of collateral by transferring what could be an individual liability to a group liability and holding the group morally responsible for repayment. If one member fails to make the loan payment on time, the company may not extend any to that particular group in the future. Thus, the group can make payments on behalf of the individual defaulter.



According to the 2009 'Microfinance India State of the Sector' report, the average loan outstanding per client increased 23.8%to Rs5,200 in 2009 from Rs4,200 in 2008. — Moneylife Digital Team

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%.

VERDICT : AVOID

EIL:

AN FPO ITS ONLY RISK IS PRICE MAY FALL BELOW FPO PRICE POST NEW SH LISTING.

SKS :

ONLY RISK IS SOME PEOPLE BELIEVE VALN ARE TOO STRETCH TO INVEST.

B CORP :

ONLY RISK TO ME IS "ONE PRODUCT CO" BUT WHAT ABOUT MARICO.

SO IN ALL THE 3 B CORP SEEMS TO BE SAFEST BET, BECAUSE OF ITS LOW IPO SIZE IT MAY GIVE GOOD RETURNS COMPARED TO OTHER 2 IPO.

SO IF ANYONE CAN CINVINCE HIMSELF HE MAY PUT ALL HIS MONEY IN BCORP GIVEN SO MUCH UNCERTAINTY IN EIL AND SKS.I M ALSO THINKING ON THIS IDEA.

SREEDHAR,
WHATS UR VIEW ON MY ABOVE IDEA, ITS ALSO IN LINE WITH MY PRINCIPLE OF CAPITAL SAFETY FIRST AND AT MOST 30-40 % ALLOTMENT OF WHAT I APPLIED FOR.

THE ONLY POINT EVERY BROKER IS EMPHASING ON IN SKS IS PRICE TO BOOK VALUE.

SKS P/BV WILL BE 3.8 TIMES COMPARABLE PEERS GLOBALLY TRADES AT P/BV OF 8 TIMES, SO 100% UPSIDE SEEN FROM ISSUE PRICE!!!!

ITS GROWTH AND MARGINS ARE ALSO BETTER THAN ANY OTHER MF.

SO THESE 2 ONLY MAKE THE IPO ATTRACTIVE, MY TARGET POST LISTING WOULD BE RS 1200, ITS A SEXY AND UNIQUE SPACE LIKE JUBLIANT FOODS.REASONABLE SIZE RURAL PLAYS ALWAYS EXCITES FIIS LIKE ADVANTA, ITC, M&M , ETC SKS IS ALSO A GOOD RURAL PLAY WILL SEE HUGE SUBSCRIPTION AS SEEN IN ANCHOR BOOK INSPITE PRICY VALN AND GO ON TO LIST AROUND 1200.

Be Sure that the share price is going to list at Rs 1250/- And touch 1998 up to the close of Market at 3.30 p.m on the day of listing.

My bet is on MFI as they are meeting social objective of financial inclusion , where no one ( including PSU banks ) ever tried to venture !
Also, my simple funda , no risk no gain ..
Take care all.

MUJHE TO EK TIME KA BHI TOTA LAGATA HAI

SKS KAR DOONGA
SKS = SUB KUCH SAAAAAAAAAAAAF

This time i agree with Mr. Saharanpuri. who is very right that pe is 50 on trailing results post expanded capital. even a grwoth of 100% will keep pe above 20 or even 25 next year.

Its very difficult to make SETU JAIN understand that CAR of 40% does not mean that the company is creditworthy. this is just beacause nobody gives this type of finance company big loans.

i dont know that what amount of loans have been given to sks by those big banks or companies (as mentioned by SETU JAIN). All these Banks/Companies may have given these loans against proper securities and charged better rate of intrest to cover additional risk they have with finance companies.

If this SKS was a creditworthy party than it could have got loan much bigger than what its currently enjoys. Even it couls have got public deposits from its areas at lower rates.

SBI keeps its CAR just above minimum requirements, becasuse it gets loans from depositors very easily at cheap rates. so does other banks do. there is no need for these banks to maintain a CAR of unreasonably high. no Company is such fool that, it will keep its CAR significantly higher than required. BUT companies like SKS has no option because, public have no faith in micro finance companies, they dont deposit money there, banks charge higher intrest that too against reasonable guarantees or colltoral.

regards

DEAR ALL,
CAN ANYONE GUESS....HOW MANY TIMES SKS MICROFINANCE WILL BE SUBSCRIBE IN RETAIL?

TAHNK YOU.

CONTRARIAN RECOMMENDATION FROM FIRSTCHOICEIPOANALYST KR PRASANNA
The company has fixed the price band at Rs 850-985 for the IPO, which is slated to open on 28-07-10. SKS Micro is proposing to issue 1,67,91,579 Equity Shares of Rs. 10 FV, including the offer for sale of 93,46,256 shares.

SKS Micro earned a net profit of Rs 173.95cr for FY10. On the post issue capital of Rs 71.97cr, the EPS comes to around Rs20/- At the upper price band, the company is demanding a valuation of almost 50 times its FY 10 earnings. For an NBFC, which has limited period of history and no dividend track record, the valuation is very very much stressed.

APART FROM IRRATIONAL PRICING, CONSIDER THE FOLLOWING BEFORE TAKING THE INVESTMENT DECISION:


1. Unethical business: The Company is charging interest around 40% p.a. on money lent to the poor and down trodden.

2. Unsustainable business model: The business model will not sustain in the long -run.

3. No commitment from the promoters: SKS’s founder and chairman sold his shares to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million in Feb. this year.

4. Look at the salary of top executives :

Suresh Gurumani - Managing Director of the Company. The total monthly salary is Rs. 12, 50,000. In addition to the above, Mr. Suresh Gurumani was paid onetime bonus of Rs. 10,000,000, in April 2009.

Dr. Vikram Akula - chairman Rs 70.00 lacs p.a. In addition, ESOP amounting to Rs10.97lacs, totaling Rs 1.79cr p.a.
The irony is they are trying to eradicate poverty.

5. Mohd. Yunus says - “I get very worried when investment funds come to microfinance,” said the founder of Bangladesh’s Grameen Bank, which pioneered the industry by giving small loans to rural women to start their own businesses. “I don’t want to excite businessmen that there is profit to be made here,”


6. The IPO will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. The hapless borrowers continue to live in abject poverty.

7. Government /RBI will not be mute spectators to the exploitation.
They are bound to regulate the segment. This will make the business un- attractive.


8. Financial inclusion initiatives taken by the public sector banks/government will marginalize the micro finance business. Do not buy the theories put forth by the BRLMs to sell the issue.

9. The average cost of acquisition of shares by promoters is less than Rs50/-

10. The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.

RECOMMENDATIONS: CLEAR NO.

Name
      
Issue price
      
Current price
      
BRLMS
1. D B Realty
      
Rs 468
      
Rs384
      
Kotak,Enam
2. HATHWAY CABLES

      
Rs 240
      
Rs182
      
Kotak,Enam,Morgan Stanely
3. NITESH ESTATES

      
Rs 54
      
Rs 38
      
Kotak, Enam, ICICI Securities

SOME SERIOUS ISSUES RAISED AGAINST SKS MICRO IPO
1. Unethical business: The Company is charging interest around 40% p.a. on money lent to the poor and down trodden.


2. Unsustainable business model: The business model will not sustain in the long -run.


3. No commitment from the promoters: SKS’s founder and chairman sold his shares to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million in Feb. this year.


4. Look at the salary of top executives :

Suresh Gurumani - Managing Director of the Company. The total monthly salary is Rs. 12, 50,000. In addition to the above, Mr. Suresh Gurumani was paid onetime bonus of Rs. 10,000,000, in April 2009.

Dr. Vikram Akula - chairman Rs 70.00 lacs p.a. In addition, ESOP amounting to Rs10.97lacs, totaling Rs 1.79cr p.a.
The irony is they are trying to eradicate poverty.

5. Mohd. Yunus says - “I get very worried when investment funds come to microfinance,” said the founder of Bangladesh’s Grameen Bank, which pioneered the industry by giving small loans to rural women to start their own businesses. “I don’t want to excite businessmen that there is profit to be made here,”


6. The IPO will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. The hapless borrowers continue to live in abject poverty.

7. Government /RBI will not be mute spectators to the exploitation.
They are bound to regulate the segment. This will make the business un- attractive.


8. Financial inclusion initiatives taken by the public sector banks will marginalize the micro finance business. Do not buy the theories put forth by the BRLMs to sell the issue.




9. The average cost of acquisition of shares by promoters is less than Rs50/-The Company has limited period of history and no dividend payment record.


10. The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.

CONTRARIAN VIEW ON SKS MICRO IPO BY REPUTED COLUMNISTS SUCHETA DALAL

Is SKS Microfinance IPO being done at its peak performance?
July 28, 2010 01:53 PM | Bookmark and Share
Moneylife Digital Team
sks-micro-finance 9

An IPO multiple of 50 reminds one of the era of tech bubble. Plus, there are other issues like commitment of the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities

The much talked about initial public offering (IPO) of India's largest microfinance lender, SKS Microfinance Ltd, hits the capital market today with a price band of Rs850 to Rs985 per share. The issue closes on 2 August 2010. The issue opened for subscription yesterday for anchor investors. SKS is issuing 1.67 crore equity shares of Rs10 each.

With earnings per share (EPS) of Rs32.98 as on 31 March 2010, SKS trades at price earnings ratio of 26 at the lower band and 30 at the upper band based on pre-IPO capital. The issue consists of a fresh issue of 74.45 lakh shares with 50.37 lakh shares reserved for retail investors. Qualified Institutional Buyers (QIBs) will be allotted one crore shares. The company is expecting to raise Rs1,427 crore-Rs1,654 crore through this IPO.

Financials and other information provided by SKS appear good on paper. However, there are some issues with the company, like high valuation of the IPO, question of commitment from the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities.

At the upper price band of Rs985, the company is demanding a valuation of almost 50 times its FY10 earnings, on post-IPO capital. For a non-banking financial company (NBFC), which has a limited period of operational history and no dividend record, the valuation looks very much stressed.

Although the company in its draft red herring prospectus (DRHP) claims that it has no competitive peers, SE Investments Ltd, a microfinance lender, is already listed on the Bombay Stock Exchange (BSE). SE Investments' EPS stands at Rs1.21 in the first quarter of FY10. The company posted a net profit of Rs17 crore. Based on the EPS of the first quarter of FY10, its P/E works out to 11 (annualised), which is lower than the PE of SKS.

SKS reported a net profit of Rs174.8 crore on total revenues of Rs958.9 crore and an operating revenue of Rs873.50 crore for the year ended 31 March 2010. It had a negative cash flow of Rs541.20 crore for the year ended March 2010.

According to the DRHP, the key management of SKS Microfinance has decided to sell their stake in the run-up to the IPO under both stock option and stock purchase plans at a significant premium. Collectively, the transactions would imply a sale of 1.42 million shares or 8.4% of the IPO size. Although the Reserve Bank of India (RBI) has approved the transactions and there is nothing illegal about en-cashing investments, this raises a larger question of commitment on the eve of an IPO.

Another related fact is that out of the total issue size of 1.68 crore shares, more than half or 55.7% shares are put on sale by Sequoia Capital.

According to KA Prasanna of firstchoiceipoanalysis.com, the IPO of SKS Microfinance will make the promoters, and other venture capitalists including some private equity funds that have stakes in these companies, millionaires. The hapless borrowers continue to live in abject poverty, he added. Earlier in February, SKS Microfinance's founder and chairman Dr Vikram Akula sold 9.45 lakh shares at Rs639 per share to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million, Mr Prasanna added.

SKS Microfinance also offers high remuneration to its top management. Its chief executive and managing director, Suresh Gurumani, is entitled to a consolidated salary of Rs1.5 crore per annum, besides a performance bonus of Rs15 lakh per year, with annual increments up to maximum of 100% with the board having the liberty to approve any further increase over and above the 100%. Another shocking part is that Mr Gurumani was paid a one-time bonus of Rs1 crore in April 2009, barely five months after joining the company.

SKS Microfinance maintains a medium- to long-term borrowing profile, against which its lending maturity is within one year. This creates a significant asset-liability mismatch and exposes the company to interest rate risk.

SKS has expanded its membership to 6.8 lakh across 19 States during FY10 from 2.02 lakh in five States from FY06. Currently the company has 2,029 branches with total outstanding loans worth Rs2,936.70 crore as on 31 March 2010. During the same period, its debt to equity ratio stood at 2.84:1 with net non-performing assets (NPAs) of Rs4.8 crore or 0.16% of outstanding loans.

SKS provides small loans exclusively to poor women located in rural areas across India. The loans extended are purely for business and other income-generating activities and not for personal consumption. The company will use the IPO money to meet future capital requirements.

With increased area of operation and scaled-up activities, microfinance is increasingly gaining credibility in the mainstream finance industry with many traditional large finance organisations contemplating a foray into this business.

From the geographical perspective, microfinance activity has traditionally been concentrated in southern India as 57% of the microfinance institutions (MFIs) and about 71% of the microfinance borrowers of the country are from this region.

Currently, the National Bank for Agriculture and Rural Development (NABARD) holds the right of regulatory oversight over MFIs except NBFCs. However, there exists a significant regulatory risk as the government may create a separate regulator for all MFIs. More importantly, the high interest rates charges by these MFIs may attract regulatory actions from the government or regulators, which may have a material impact on the ability of these institutions to sustain high returns. For the year to end-March, SKS charged an interest rate ranging from 26.7% to 31.4% to its customers.

Recent rules require NBFCs to maintain a capital adequacy ratio of at least 12% by 31 March 2010 and 15% by March next year. SKS' capital adequacy ratio was much higher at 28.3% as on 31 March 2010.

Kotak Mahindra Capital Co Ltd, Citigroup Global Markets India Pvt Ltd and Credit Suisse Securities (India) Pvt Ltd are the lead book running managers to the issue.

Rating agency CARE has assigned an 'IPO Grade 4' to the SKS IPO indicating 'Above Average' fundamentals.

Background

Swayam Krishi Sangam (SKS) Society, a non-profit, non-government organisation (NGO), converted itself into SKS Microfinance, a non-banking financial company-non deposit taking (NBFC-ND) in 2005. Later in 2009, SKS Microfinance became a public limited entity from a private limited company. In addition to loans the company offers insurance products and productivity loans or loans designed for purchase of goods that enhance the productivity of members. SKS Microfinance has a tie-up with Bajaj Allianz Life Insurance Co Ltd and as of March 2010, had sold 2.9 million insurance policies.

SKS uses a village-centred, group-lending model to provide unsecured loans to its members. SKS Microfinance organises prospective clients into groups so that they can address the issue of information asymmetry and lack of collateral by transferring what could be an individual liability to a group liability and holding the group morally responsible for repayment. If one member fails to make the loan payment on time, the company may not extend any to that particular group in the future. Thus, the group can make payments on behalf of the individual defaulter.

According to the 2009 'Microfinance India State of the Sector' report, the average loan outstanding per client increased 23.8%to Rs5,200 in 2009 from Rs4,200 in 2008.

The capital adeq. ratio is 28.3% as on Fy10 and not 40% (as mentioned by One idiot). Would suggest him to read RHP available in SEBI website before pass half informed comments about the company.

And when compared to EIL Vs Bajaj Corp Vs SKS, i prefer SKS for the simple reason dat it gives me a retail discount of 50/- and grey marker premium of Rs. 60/-. So not less than 100 bucks per share would be my listing gain.

Jai ho SKS