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Higher loan limits: Big boost for SKS Microfinance

Small bank licence will be a big trigger

Ujjval Jauhari
Last Updated : Apr 07 2015 | 11:38 PM IST
The Reserve Bank of India (RBI) didn't give many reasons to the Street to cheer but it did provide a boost to micro finance companies.

SKS Microfinance, which significantly outperformed the S&P BSE Sensex benchmark in the past six months, jumped 8.6 per cent to close at Rs 514.

RBI has doubled the indebtedness limit for borrowers in micro finance institutions (MFI) to Rs 100,000. Further, the annual income limit of rural households to qualify for micro finance was raised from Rs 60,000 to Rs 100,000, and of urban households from Rs 120,000 to Rs 160,000. The maximum disbursement (first cycle) limit was also raised from Rs 35,000 to Rs 60,000.

All this is positive for SKS as it doubles the addressable market size, says Ankit Ladhani at Karvy Stock Broking. A bigger market should lead to higher growth, say analysts, and it comes at a crucial time.

Digant Haria at Antique Stock Broking says this is a big positive for the sector, as it portends strong loan book growth for many years. Many MFIs have seen saturation in some states as the borrower had already taken Rs 50,000. Now, the addressable market size gets doubled. He continues to like SKS in this space.

SKS, after a turnaround in FY14, has been doing well. The new management has been implementing a revised strategy to turn profitable and boost growth. Diversification outside Andhra has yielded good results, with the registered office also relocated from Hyderabad to Mumbai. It also gave more option to customers as loans for buying mobile phones and gold, among others.

Given its diversified product portfolio and the challenges on estimating the increase in potential customer base, analysts are still trying to quantify the potential upside in revenues and profits due to the new norms. Further, some believe that the healthy growth rate was already being factored in, so they will wait for the March quarter results and management commentary to arrive at a conclusion.

Nevertheless, the increase in upper limits should lead to higher growth and reflect positively on SKS’ earnings.

Prior to the new norms, analysts at CRISIL had estimated an increase of 27 per cent for FY15 over a year before in disbursement, to Rs 6,000 crore. Other analysts were expecting a strong growth in earnings, though part of it can be attributed to a low base. With the new norms, the growth in earnings for FY16 should move close to the 20s.

There are other triggers as well. SKS is India's second largest and only listed MFI, with 1,268 branches in 15 states as at end-September. Assets under management was Rs 3,200 crore, and the company has also applied for a small finance bank licence.

The bigger trigger will be if it gets this licence. The criterion of the 75 per cent of loan book to priority sector, 50 per cent of loan book below Rs 25 lakh in ticket size, and 25 per cent of branches in unbanked areas make MFIs the preferred contenders for obtaining a small finance bank licence. In addition to fulfilling all this criteria, SKS has a strong rural presence, pioneering technology and a state-of-art process, says Haria of Antique Stock Broking. His current target price (before Tuesday’s development) was Rs 508, similar to the Rs 510 set by First Global.

Though majority of analysts polled by Bloomberg have a 'Buy' call on the stock, their consensus target price is around Rs 500. Investors could, thus, await correction to enter the stock.

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First Published: Apr 07 2015 | 10:48 PM IST

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