Expect to turn profitable by Q3: SKS Microfinance

SKS Microfinance has declared its first quarter results. The company's Q1FY13 net loss was at Rs 38.8 cr versus loss of Rs 218.7 cr, YoY.

In an interview to CNBC-TV18, Dilli Raj, chief financial officer of SKS Microfinance says, the company should revert to the path of profitability by Q3. "We have consolidated the branches and rationalised the headcount. All asset quality indicators have reverted back to the pre AP crisis. So, we could have some one-off cost in Q2. We should be in black by Q3," he adds. Below is the edited transcript of his interview with Udayan Mukherjee. Q: You have cut your losses to just about Rs 38 crore. By when do you see yourself getting back into the black? A: We should revert to the path of profitability by Q3. We have consolidated the branches and rationalised the headcount. All asset quality indicators have reverted back to the pre AP crisis. So, we could have some one-off cost in Q2. We should be in black by Q3. Q: After that, you see a sustainable path in staying in the black, it is not just a one-off; you will turn back into profits for good in the medium-term, right? A: Absolutely. Q: How much of this optimism is coming in from purely the non Andhra Pradesh portfolio because that’s where you have seen the maximum traction in the current quarter as well? A: It is purely driven by the non-AP portfolio. So far as AP is concerned, we have written off 85%. Ofcourse August 3 RBI guideline also gives us some dispensation on that. At the start of the AP crisis, we had 30% assets in AP and 70% non-AP and the contagion risk did not spread to the non-AP portfolio. But we have had one issue on the non-AP portfolio. Given the supply side shock and the reaction of the bankers, despite there being no adverse change in collection efficiency or consumer behavior or attitudes of the state governments, the non-AP portfolio had to decline quarter after quarter. That got reversed in Q4. That was thus shown up in Q1, 11% growth in non AP revenues. Also, we have raised the capital, the much needed growth capital to grow the non AP book has. It has come-in in July 2012, we have raised Rs 265 crore. We have a net worth of Rs 650 crore. So, from now on the idea is to keep the non-AP book at 100% of the total portfolio. _PAGEBREAK_ Q: For the non-AP portfolio, do you see this double digit growth quarter on quarter sustainable even going forward on the 11% that you delivered in this quarter? A: Certainly, yes because there are no issues. Fortunately, all the disruptions happened on the supply side and none at the demand level. If you look at the underlying business, that continues to be robust and we have a huge demand. Also, if you look at the sector, the competitive landscape, the consolidation has played out to our advantage. The number two to number five players have gone for corporate debt restructuring. They had 40% market share in the non-AP market. So that’s available for you to go out and grab it. Most importantly, we were rationing the capital and credit size to our customers. We have four million members outside AP, but we have only 2.3 million borrowers outside AP. That means we have actually kept one million borrowers in the queue over the last 20 months. So, meeting that demand is much easier now with capital and debt flowing in. Q: You alluded to the RBI guidelines. Now you have got a five-year window to make provisioning for the AP portfolio bad loans. But on top of what you have done already, how much of an incremental positive is it for you? A: It is positive in the sense we still have a residual toxic exposure of Rs 235 crore on AP. Yes, ofcourse 85% is treated. So, if we were to make it the way RBI guideline gives the flexibility to add back to your capital adequacy competition, the major positive for us is that this kind of dispensation averts the need for further capital dilution for next five years. Q: You have also got the flexibility of charging more than 26% interest. Do you see that as a material positive? A: It is very positive in the sense now we have the operational flexibility to price individual credits. But so far as this case is concerned, we have consciously kept it at lower than the earlier level of 26%. Our interest rates are at 24.5%. But this is flexibility. More importantly, the real positivity on the new RBI guidelines, August 3, is that earlier the interest rate risk was to our account. Now, we are insulated from the interest rate risk and we could pass it on to the customers. That’s the major positive. Q: So, if you are going to start declaring profits from the third quarter, according to your guidance, you should not need to raise any more equity capital, given what you have raised already for the next couple of years, right? A: Yes. Q: Do you have any further timelines or roadmaps for further balance sheet cleanup over the next three-four quarters? A: We have the Rs 235 crore AP exposure on our balance sheet. The guidelines have come on August 3. We will just evaluate it in line with it and take a call on that.