 "More legs to the rally in SKS Microfinance")
SKS Microfinance’s strong turnaround after the Andhra Pradesh crisis has led to a sharp re-rating in its scrip in the past three years, including a handsome 35 per cent gain in the past year compared to a 5.5 per cent decline in the S&P BSE Sensex. Last Thursday, it made a new 52-week high of Rs 593.8.
Part of last week’s gain could also be attributed to the strong debut by peer microfinance institution and small finance bank (SFB; operations to be launched) Equitas Holdings. While SKS is comparable to the likes of Equitas and Ujjivan Financial Services currently, the same will not hold true with the transition of the latter two into SFBs.
Although at Monday’s closing price of Rs 581 — SKS trades at four times FY17 estimated book — there could be more legs to the stock’s rally. “While the valuations appear high, we believe they are justified - given the high medium-term growth visibility, strong profitability and superior asset quality. Current valuations should sustain and could improve, given the strong profitability,” write analysts at Motilal Oswal Securities in a recent note on SKS.
Cross-selling of its products such as financing for mobiles, solar lamps and sewing machines will help fuel SKS’ growth. SKS plans to introduce cross-selling for more products such as bicycles, water purifiers and biomass stoves, among others. These initiatives should take earnings contribution from cross-selling to about 20 per cent going forward from 7-9 per cent prevailing.
With limited branch expansion and falling cost of funding (improved credit rating, higher borrowings from Mudra Bank) SKS’ operating efficiency and profitability will improve. Its return on equity stood at a healthy 24.9 per cent in FY15 and is likely to expand to 28 per cent levels in FY18, estimate analysts. Against this backdrop, most analysts remain positive on the scrip and believe it could continue to do well in the near future.
Part of last week’s gain could also be attributed to the strong debut by peer microfinance institution and small finance bank (SFB; operations to be launched) Equitas Holdings. While SKS is comparable to the likes of Equitas and Ujjivan Financial Services currently, the same will not hold true with the transition of the latter two into SFBs.
Although at Monday’s closing price of Rs 581 — SKS trades at four times FY17 estimated book — there could be more legs to the stock’s rally. “While the valuations appear high, we believe they are justified - given the high medium-term growth visibility, strong profitability and superior asset quality. Current valuations should sustain and could improve, given the strong profitability,” write analysts at Motilal Oswal Securities in a recent note on SKS.
Cross-selling of its products such as financing for mobiles, solar lamps and sewing machines will help fuel SKS’ growth. SKS plans to introduce cross-selling for more products such as bicycles, water purifiers and biomass stoves, among others. These initiatives should take earnings contribution from cross-selling to about 20 per cent going forward from 7-9 per cent prevailing.
With limited branch expansion and falling cost of funding (improved credit rating, higher borrowings from Mudra Bank) SKS’ operating efficiency and profitability will improve. Its return on equity stood at a healthy 24.9 per cent in FY15 and is likely to expand to 28 per cent levels in FY18, estimate analysts. Against this backdrop, most analysts remain positive on the scrip and believe it could continue to do well in the near future.