Why are experts, broking firms bullish on SKS Microfinance?

BSE | NSE 10/02/12

Jaypee Capital Services

SKS is the largest MFI in India in terms of total value of loans outstanding, number of borrowers and number of branches. The total loans outstanding increased at a CAGR of 162.9% from Rs. 780.50 million as of March 31, 2006 to Rs. 14,175.23 million as of March 31, 2009. The IPO comprises of a fresh issue and offer for sale for augmenting the capital base to meet the future capital requirements. SKS has expertise in Microfinance and have been focused on lending to poor women in India. It has a superior asset quality. As of March 31, 2010 its net non performing assets, or NPAs, was Rs 48.03 million or 0.15% of loans outstanding. It has a scalable operating model and looks to increase its customer base and ticket size in future.

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.