Brokerages see opportunity in select microfinance players

While loan collection efficiency has improved, stock valuations are at reasonable levels

Stocks of microfinance institutions (MFIs) and small finance banks (SFBs) gained up to 4 per cent in trade on Wednesday, compared to a flat broader market on reports of improving collection efficiency in most states, barring Maharashtra. With loan collections improving to levels seen prior to demonetisation, brokerages believe the risk-reward ratio has turned favourable in certain stocks. While Ujjivan Financial Services and Equitas Holdings were up about 4 per cent each, Bharat Financial Inclusion (earlier SKS Microfinance) gained 1 per cent.

Analysts at Motilal Oswal Securities highlight management views which indicate that collection efficiency has improved in most states. While collection efficiency in Uttar Pradesh has largely returned to 98 per cent-plus levels from 30-40 per cent levels a few months ago, the proportion of loans outstanding for three months are down to sub-15 per cent. While similar improvement has also taken place in other major states such as Karnataka and Madhya Pradesh (with doubtful loans under 15 per cent), the situation in Maharashtra continues to be a worry as the bad loans proportion is at 17-20 per cent. While managements are confident that the farm loan waivers won’t have much of an impact, analysts are a bit cautious and want to look at delinquency levels over the next few quarters. They highlight there are a few districts in Maharashtra, Madhya Pradesh and Karnataka where MFIs have not been able to make collections of payments which were overdue and will eventually have to write them off. This could range from 3-10 per cent depending on the MFI.

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However, given the sharp correction that the stocks have seen after demonetisation, Digant Haria and Bhavik Mehta of Antique Stock Broking say the valuations have corrected to reasonable levels and the risk-reward ratio has turned favourable. They expect Bharat Financial and Ujjivan to rebound strongly in the second half of FY18, given their diversified geographic presence, strong control over operations and healthy capital position, and hence are positive on their prospects. They have downgraded Equitas to “hold” rating given weak earnings trajectory due to weakening microfinance book. While Ujjivan and Equitas are trading at 1.8-2 times their FY19 price-to-book estimates, Bharat Financial’s valuations are pegged at 3 times. A key monitorable, though, would be the behaviour of rural customers, given the loan waivers that have come through recently.