SKS Microfinance to raise FII limit

SKS Microfinance is planning to raise the investment limit for Foreign Institutional Investors (FIIs) from the existing 24% to 74% of the company's paid up equity shares. The decision will be taken in the Extraordinary General Meeting, scheduled on Dec 21, 2011. The move is aimed at attracting foreign investors to the company. As on September 2011, FIIs were holding 19.02% of the paid up capital (decreased by 156 bps sequentially).

We feel that this decision by the company is surprising, not because the investment limit has been raised, but on account of the fact that in the past, FIIs have continuously sold of their shares, bringing down their stake.

The move is not expected to have much of an impact on the company, as in any case, the existing FII limit of 24% is not fulfilled. However, one can expect speculative trades, as some FIIs may buy for a shorter tenure, driving the market price of the company up.

The following table shows the shareholding pattern of the company for the last 5 quarters:

In Aug 2010, SKS Microfinance had come up with an IPO. This IPO was oversubscribed 13.69 times, and its Issue Price was fixed at the higher band of Rs 985 per share. The company's shares have recorded an all-time high of Rs 1491.50 on the bourses (in the past 16 months). Today, on Dec 2, 2011, the scrip closed at Rs 102.50, down by a whopping 93% from its all-time high, and is a net value destructor.

SKS Microfinance had faced problems when the Andhra Pradesh govt. decided to regulate the sector, as they thought that the company was charging higher interest rates and had strong recovery methods, leading to many suicides. This is evident from the disappointing financial numbers posted by the company. In H1 FY12, the company’s topline declined by 57% to Rs 286 cr, while its bottomline reported a loss of Rs 603 cr versus net profits of Rs 147 cr in the same period last year. Provisions increased to Rs 537 cr, as against Rs 29 cr that were made last year.

Outstanding loans in Andhra Pradesh amount to Rs 822 cr as on Sept 30, 2011. The total cushion available under deferred tax benefits is of Rs 485 cr. Hence, if the company writes off the entire loan in the state, it would be exposed to net residual risk of Rs 337 cr. It has now reduced its exposure to Andhra Pradesh, and it has no contagion with other states. Overall, the collection efficiency of the company in other states is between 96%-97%, while that in Andhra Pradesh is just 10.70%. Now, however, SKS Microfinance is fully equipped with the RBI’s new regulatory framework. (including the income of borrowers’ family, tenure, collateral, interest rate, processing fee etc.)

The microfinance sector still doesn’t look promising, as it faces regulatory and liquidity issues. This is evident from the fact that SKS Microfinance, the largest player in the sector, has seen very dismal earnings. Though the scrip is available at a mere Rs 102, one should not assume that the worst is over for the company. We would advise our Investors to avoid the counter, and to take a wait and watch approach towards the company.