SKS Microfinance, my preferred play in the financials space, BUY with a 12 month target of Rs 500/-

SKS Microfinance is India’s only listed micro-finance company, the stock has seen a huge run up this last year from Rs 140/- to the CMP of Rs 363/-, that said the improving fundamentals of the company and the economic scenario that we are in make me believe that this is an interesting add to our portfolio.  Since the run up has been steep it would be a good idea to try and buy the stock on dips and also to keep a 1 to 2 year investment horizon so that we get the benefit of the positive possibilities that the stock is displaying.

Strong Q2 numbers

SKS Microfinance  September quarter net profit jumped nearly 250 percent to Rs 56.8 crore from Rs 16.3 crore a year ago.

Net interest income saw 63 percent increase at Rs 110 crore from Rs 68 crore a year ago.

Gross revenues for the quarter stood at Rs 201 crore, up from Rs 135 crore a year ago. Its overall loan portfolio, excluding Andhra Pradesh and Telangana, witnessed 50 percent year-on-year growth to Rs 3,043 crore from Rs 2,029 crore.

Loan disbursements registered a 73 percent increase to Rs 1,693 crore from Rs 978 crore.

Gross bad loans stood at 0.1 percent from 0.2 percent, and its collection efficiency stood at 99.8 percent during the reporting quarter which was a tad better at 99.9 percent in the year ago period.

The company’s membership base excluding Andhra and Telangana witnessed a 28 percent year-on-year growth to 41.71 lakh. As of end September, SKS had a net worth of Rs 951 crore and capital adequacy of 33. 2 percent (without the Reserve Bank dispensation on the Andhra and Telangana provisioning). Cash and cash equivalents (excluding security deposit) stood at Rs 530 crore at end Sptember. The un-availed deferred tax benefit of Rs 522 crore will be available to offset tax on future taxable income, SKS added.

FII’s have hiked their stake in it to all-time high of 44.72 percent during the July-September quarter, earlier they held 36.90 percent stake in SKS at the end of September 30 last year and have now raised their stake to 44.72 percent during the July-September quarter of 2014-15, as per the latest information available with the stock exchanges.

However, the stock had taken a major beating since its listing in August 2010 at a price of over Rs 1,000 per share.  There had been a major policy clampdown on micro finance institutions following a spate of suicides by small borrowers amid allegations of strong-arm recovery tactics adopted by them. The company had debuted on the bourses after sale of shares in Initial Public Offer at a price of Rs 985 apiece. But post the clarity in the regulations the company has over the last year gotten its house in order and the run-up in the stock has been based on improving fundamentals.  What makes me bullish  on the stock at current levels is the improving inflation data, and the possibility of a rate-cut in the not too distant future, the sentiment change that this will bring to the economy could help this company do much better in the coming year.

At the current market price of Rs. 363, the stock P/E ratio is at ~20 x FY16E EPS of Rs 18. Price to Book Value of the stock is expected to be at 7.14 x FY16E. I recommend ‘BUY’ with a target price of Rs. 500 with an investment horizon for a year.

Comments

  • Very informative article ma’am pls keep sharing. But could you pls make an arrangement on your blog like other blogs where we can subscribe to your articles & recomendations on our email. So that whenver you’ll post any article or recommendation it will end up in our inbox. If possible pls put this facility on your website. Thanks.

    harshNovember 8, 2014
    • sure, thanks,

      Sharmila

      Sharmila JoshiNovember 10, 2014
  • Hello Ma’m,

    Just stumbled across your site today and this article got my attention. I can see that SKS finance’s CMP is now 457 so I must say there is a valuable result on your recommendation. Sadly I saw your article today only :-)

    I can see that you didnt post anything after November, we are expecting more recommendations from you. We also would like to subscribe for you recommendation updates via email alerts which is easily achievable by using the wordpress that you are using now.

    Thanks,

    SathyanMarch 3, 2015
    • Thanks for writing in the stock hit its target but I think you can continue to hold

      Sharmila JoshiApril 8, 2015

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