SKS Microfinance Limited is tapping the capital markets and the issue which has opened on Wednesday the 28th of July closes on Monday for other applicants while it has closed for QIB’s on Friday. The company had made an anchor allocation as well and a total of 30,22,484 shares were allotted to 36 entities at the top end of the price band of Rs 850 to 985.

This issue has been hyped and has been embroiled in controversies and could change the way people look at microfinance companies going forward. At the end of bidding for QIB’s a total of 14,37,20,703 shares were bid for making the remaining QIB portion oversubscribed by 20.38 times. If however one was to add to the original QIB figure the anchor investor received and divided the bid quantity the oversubscription figure would be 14.56 times. The issue was so highly hyped that unconfirmed figures from merchant bankers put the QIB portion at a staggering 80-100 times. Thankfully nothing of that sort happened and the figure was a respectable and digestible figure.

Business
SKS Microfinance is as the name suggests into microfinance. SKS is the largest microfinance company in India in terms of total value of loans outstanding, number of borrowers, and number of branches. Its core business is to providing small loans exclusively to poor women predominantly located in rural areas in India. These loans are provided to such members essentially for use in their small businesses or other income generating activities and not for personal consumption. These individuals often have no, or very limited access to loans from other sources other than private money lenders that are normally charging very high rates of interest.

SKS began operations in 1997 and was founded as a public society in the state of Andhra Pradesh. It functioned as an NGO or non- governmental organisation, providing microfinance in the state of Andhra Pradesh. Somewhere down the line the inherent not for profit organisation changed its business perspectives in 2003 and became a for profit organisation with the intention to maximise the shareholder’s returns from the business.

There have been huge discussions and controversies where an NGO having taken donations and funding from charitable institutions could change their perspective. Also what happens to the corpus and money which has been collected and has grown over the years? Many of these questions remain unanswered even today and it is this grey area which could hurt the industry going forward.

The company is a market leader in its field in India and has a pan India rural distribution network. The various products offered by the company are as follows: –

• Income generating loans
• Mid-term loans
• Life Insurance Loans
• Emergency loans and advances
• Productivity loans
• Housing loans

The company also distributes third party products in the insurance sector such as Loan cover insurance and Life Insurance.

Objects of the Issue
The objects of the issue from the proceeds of the fresh offer of shares being offered to the public is as follows: –

• Augment our capital base to meet our future capital requirements arising out of growth in our business
• To achieve the benefits of listing on the Stock Exchanges.

This issue would also rank as probably one of its kind issue which has a simultaneous offer for sale and fresh issue of shares where the offer for sale is substantially larger than the fresh issue of shares.

Financials
The income from operations has been growing significantly and has moved up sharply from 162.47 crs in March 2008 to Rs 506.07 crs in March 2009 and to Rs 873.57 crs in March 2010. The other income has been Rs 7.54 crs in 2008, Rs 47.93 crs in 2009 and Rs 85.36 crs in 2010. The total income has been R 170.01 crs in 2008, Rs 554 crs in 2009 and Rs 958.93 crs in 2010. The profit after tax has been Rs 16.58 crs in 2008, Rs 79.69 crs in 2009 and Rs 174.84 crs in 2010. 

Comparisons
The company believes that none of the listed companies in India are engaged exclusively in the business of microfinance. Probably because of this feeling they believe that they can set the benchmark for any pricing. There is a comparable company in S E Investments which was quoting at about 1/3rd the price earnings multiple before the price band was announced for SKS Microfinance. Post the announcement the price of S E Investments has moved up by about 23% clearly indicating that looking at SKS price band new benchmark is being set.

Trying to look outside the microfinance sector if one looks at banking space, HDFC Bank one of India’s large private banks is quoting at a price earnings multiple of 30 based on June quarter 2010 annualised basis while an ICICI Bank is quoting at 20 times based on March 2010 earnings. If one were to look at Axis bank the same is quoting at 18.5 times it June quarter annualised numbers. These banks give you a wide spectrum of the private sector which quotes at a substantial premium tom its PSU cousins.

Coming to the microfinance sector, the major differences are the loan size, the area in which the loans are given, the cost of recovering the weekly repayments and the extremely high rates of interest that is charged. Even taking all this into account one does feel that the fine line between profits and obscene profits is too thin to call and probably this industry is crossing the line.

Risks
The biggest risk is political. We all know that farmers suicides and money lenders is always an issue. Secondly when it comes to elections anything to do with loans and weaker section of society is always an issue. This business has very high operating costs because of small ticket size. This also makes the interest rates extremely high and that can always bring out intervention from the government or regulators. I believe that post this issue the kind of hype that has been created intentionally or unintentionally will bring about lot of unnecessary attention to the industry and this company in particular.

Valuations
The company has fixed a price band of Rs 850 to Rs 985. The company has declared results for March 2010 and based on those numbers on a fully diluted basis the EPS for the year would be Rs 24.29.At the lower price band of Rs 850 the price earnings multiple would be 34.99 times, while at the upper price band the same would be 40.55 times. The valuations look steep and I believe a lot has to be paid for the hype and not the business.

Conclusion
The business is good, but the margins seem on the higher side and may not be sustainable. There are lot of issues and controversies concerning the company, the promoters and the various trusts who own the company. The fact that a large number of independent directors have in the last year or so resigned from the board and trusteeship leave a lot to be explained. Shares were allotted to various institutional investors about six months ago which leaves one to wonder what has dramatically changed in six months that the asking price or price band has trebled in such a short time.

Looking at all of these it appears that the investment may not be all that great as controversies far outnumber the positives. The asking price being so high may not leave enough on the table for a safe exit for investors. It may make sense to let the issue list and then take a call once controversies are addressed. Probably post listing markets may offer better opportunities.

SEBI Disclaimer: – I do not intent to subscribe to the above issue.