Here‘s why Religare Cap Mkts initiates sell on SKS Micro

Parag Jariwala, VP-Institutional Research, Banking and Financial Services, Religare Capital Markets in an interview to CNBC-TV18 gave the rationale behind sell call on SKS Microfinance and his preference for private banks over public sector banks.According to him there is no reason to be underweight on private banks because growth for them will be better than PSBs. He likes Axis Bank and Yes Bank. Below is the transcript of Parag Jariwala’s interview with Latha Venkatesh & Anuj Singhal on CNBC-TV18. Latha: Why are you so worried about SKS Microfinance after the lesson they learned in 2010or 2011 was it, haven’t they come a long way? You are using the word crisis brewing, what crisis? A: The main reason why I am negative is that if you look at the penetration level -- we have studied the most penetrated markets which are like 5 to 7 states in Southern and Eastern India they account for almost two-third of the credit. Penetration level in this market is that one out of every four or five household is borrowing from the micro finance institutions, which is not good and there are also people like you and me leaving in that state and we don’t borrow from micro finance. So somewhere the growth is going to saturate in these regions and incrementally, all the microfinance institutions are growing in Northern and Central belt where the group culture is still evolving, the credit culture is different. Traditionally, if you speak to any non-banking financial companies (NBFCs) they will tell you that the non-performing assets (NPAs) level in the southern market is bit lower than the Northern market. So, the incremental growth is getting challenging and we will come at a much lower return on equities (ROEs).Latha: Are you worried that SKS cannot grow because all the households possible have been covered or are you worried about the current quality of growth itself because your data is indicating that poor households - 142 percent of them are microfinance institutions' (MFIs) clients in Tamil Nadu. Even in Karnataka 86 percent of the poor households are MFI customers so is it that you are worried that some of them are clients to two MFI’s and therefore can default. Are you worried about the quality of SKS’s book? A: I am worried about the quality of growth. If current rate of growth can sustain for or maybe they even grow at 30-40 percent it is a possibility that clients are over leveraged and they are may be borrowing from two sources etc and the possibility of default will increase. So, that is the worry which I have. Anuj: Talking about the entire sector now, what is your call on some of these private banks like Yes Bank, ICICI Bank, HDFC Bank and what would you approach be in some of these names? A: If you ask any institutional investors, everybody is positioned in Yes Bank and Axis Bank to a large extent followed by HDFC Bank and ICICI Bank etc. So, if there is a large exchange-traded fund (ETF) based selling or client has to just wind up his position irrespective of the fundamentals, then Yes Bank and Axis will see the most correction as compared to the other stocks and that is the exact reason why both the stocks are higher than some of the other banks. Fundamentally, I don’t see any reason to go underweight on private sector banks at this point in time. I am very sure that the growth will be much better than the PSU banks although at the industry level margin compression will be there but it won’t be that material. Asset quality concerns are also there in some of the stocks but otherwise I don’t think there is any reason to go negative on the stock. Latha: So, in this fall what are you buying and are you already buying? A: Yes, I would certainly put my bets on Yes Bank and Axis Bank. Latha: Any others, none of the public sector banks? A: No, public sector banks but if the client wants to own a public sector bank, one should own SBI but otherwise the asset quality problems are still there and it will be bigger going forward, so I would not own any of the PSUs. Latha: So, at the moment your price levels for Axis and Yes are higher than current quoted levels? A: Yes, exactly.