Bharat Financial surprises positively in a tough quarter

Healthy prospects, reasonable stock valuations emerge as key positives

A better-than-expected showing in the December 2016 quarter (Q3) boosted the stock of Bharat Financial Inclusion (BFIL), or the erstwhile SKS Microfinance, on Wednesday. The scrip surged 10 per cent to Rs 745.15 against one per cent rise in the S&P BSE Sensex. In the quarter, hit by demonetisation, there was a sequential fall in the company’s loan disbursements, assets under management (AUM) growth as well as the net interest margin, which is a profitability indicator. Despite these adversities, the company restricted the decline in net profit to two per cent sequentially. The net profit figure of Rs 143 crore was way ahead of the consensus estimate of Rs 113 crore. The sharp fall in provisions was one catalyst for earnings in the quarter and lower taxes was another.

What surprised was the asset quality, which remained healthy, brushing aside the concerns on increased stress due to demonetisation. BFIL's continued emphasis on collections and strategy of lending only in centres (regions) where collections were 100 per cent enabled it to keep its asset quality intact. The gross non-performing assets (NPA) ratio stood at 0.06 per cent, lower than the 0.1 per cent both sequentially as well as in the year-ago quarter. RBI's leeway of 90 days for recognising bad loans also led to this meaningful drop in the gross NPA ratio. It will be interesting to see if this metric sustains at current levels after this window expires in April. Though most analysts believe the company's asset quality is unlikely to deteriorate meaningfully from here, some are sceptical and are watching the developments in Uttar Pradesh, Uttarakhand and western Maharashtra closely. Investors should also note that the company has now started to ease its lending norms by extending loans in centres where at least two borrower-groups have paid their dues entirely (the company typically lends to groups and women). While this will aid disbursements growth, it could also lead to slight pressure on asset quality, estimate analysts.

Despite Wednesday's surge, the BFIL scrip trades closer to its historical average one-year forward price to book a ratio of 2.9 times. Even as two of its listed peers start their journey of becoming small finance banks, BFIL is a pure play on the high-margin, high-growth potential segment of microfinance. Analysts say though the demonetisation blues will hover on its growth in the ongoing quarter, the company is poised to gain traction in its AUMs, earnings and return ratios. It is not surprising that most analysts have a positive view on the stock.