SKS fairly valued at current levels: Angel Broking

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Shares of SKS Microfinance received good response on its debut on the exchanges. Volume growth and market share gain are expected to drive growth.

Speaking to CNBC-TV18, Vaibhav Agrawal of Angel Broking says he expects SKS to retain high return on equity (ROEs) of 20%. He likes the business model even though valuations are on the steep side.

However, he does not see any substantial increase from current levels over the next year. "The valuations are already factoring in a substantial amount of growth and there is certain amount of execution risk," he adds.

Below is a verbatim transcript of the interview. Also watch the video.

Q: What is your estimate of fair value for SKS Microfinance ? How are you arriving at that fair value?

A: We believe that at the current price it is trading more or less close to its fair valuations which should be comparable with some of the private banks in the country. At these levels we would probably advice clients to take the listing gains. Even though as a company we do believe that it is an excellent business model, but at these valuations it is pretty fairly priced.

Q: At Rs 1,100 plus you are saying you would look to book profits? You would not remain invested?

A: The way we see it because the valuations are already factoring in a substantial amount of growth and there is certain amount of execution risk. At these levels the stock could continue to trade at these kind of valuations and the next stage, a leg of up move in this stock could come possibly comes once it has leveraged its capital over 18 months and is looking at the next round of equity raising. Probably in the near term over a 12 month period we may not see substantial upsides from these levels.

Q: What is your own estimate of how much they can scale up margins by and what kind of return on equity they can generate?

A: That is one of the major positives about the SKS business model. When we are looking at non-banking financial companies (NBFCs) we would like to see in the asset side they are creating the kind of value addition over and above what banks do to really sustain high return on equities (ROEs).

In the case of SKS, because of its social collateral based model as well as the distribution network it has built up, we believe that it is in a position to really sustain its ROEs at high levels of 20% plus. That is one of the major positive about the company. We believe it will continue to give good return ratios. We believe that they are not charging high interest rates compared to what we heard in the media. I think it is the cheapest compared to money lenders even other microfinance companies across the world. We believe it is sustainable at these levels, the ROEs of the company.

Q: What is your estimate of its book value by the end of this year and the end of next year?

A: Right now at FY12 book value it is trading at about 3.5 times. That works about Rs 300 in terms of book value.