Bear of the day: Stock that plunged 58% in 6 months

The new rules announced by the RBI on Tuesday could pave the way for bank funding to MFIs. Citi says that SKS Microfinance is a key beneficiary post credit policy and the target price is of Rs 605.

Why the fall?

In October, the company sacked its chief executive Suresh Gurumani, exposing a power struggle at the country's largest microlender just weeks after its initial public offering (IPO). The stock fell by around 9% on October 4, the day when the company informed the stock exchange about Gurumani's termination. This was largely because of a fear among the investor community about mismanagement of funds.

The company then issued a clarification on the termination of its former CEO S Gurumani. It clarified that the termination of Gurumani was a unanimous decision. The stock price recovered after the company clarified that there has been no irregularity of funds.

The stock again slipped after there were reports that Securities and Exchange Board of India (SEBI) had written to the company about details of Gurumani's termination.

In December, the stock got another blow. Andhra Pradesh State Assembly approved legislation to regulate the MFIs. The stock slipped nearly 5%. The ordinance took effect in October 2010 after the state government imposed heavy-handed regulations on lenders to the lowest strata of society in response to complaints over high interest rates and aggressive loan recovery practices. The ordinance severely curtailed the activities of micro-finance lenders in the state, which had been their largest single market in India.

Today's stock performance:

Today, the stock slipped 3.45% or Rs 14.85 to end at Rs 415.35. It touched an intraday high of Rs 442 and an intraday low of Rs 415. There were pending sell orders of 18 shares, with no buyers available. The total traded volumes were of 294,330 shares.

Management say:

The company welcomed the Reserve Bank of India's acceptance of the Malegam committee recommendations. Chairman of the lending firm Vikram Akula, in an interview on CNBC-TV18 today, said the latest measures taken by the RBI will provide a significant fillip to the MFI sector. Akula is now banking on relaxation in AP rules as well.

The latest policy move allows MFI's to increase interest rates. On the back of this, he says the interest rate cap which has gone up from 24% to 26% is now at a comfortable level. "But it could be a challenge for smaller MFIs," he warns. However, the 26% cap will help protect the margins.

Performance on the listing day:

SKS Microfinance had entered capital market with a public issue of 168 lakh shares during July 28-August 2, 2010. It raised more than Rs 1,600 crore through the offering, which had price band at Rs 850-985 per share.

The share got listed on August 16, 2010. On the first day, it closed at Rs 1,084.10, up 10.06% over the issue price of Rs 985.

About the company:

SKS Microfinance is India's largest and one of the world's fastest-growing microfinance organizations. It claims that its mission is to empower the poor by providing them collateral-free loans for income generation. SKS Microfinance has 7.7 million clients in 2,403 branches in 19 states across India as of December 31, 2010.

Also Read: RBI rule allows MFIs to up interest rates: SKS Microfinance