I am quite sure that this particular IPO from SKS Microfinance has generated a lot of interests among the various market participants. This is really evident from the number of mails that I am receiving regarding this IPO. Of course, there is every reason for this IPO to generate interests and fanfare among retail investors especially.
Between, there is a general opinion among investors that the IPO is expensive. Yes, it is. There is no denying about that. But, the IPO is bound to be expensive and there was no other way.
George Soros, Sequoia Capital, NRN, Vinod Khosla and who else? If you were to include the anchor investors as well the list contains JP Morgan, Morgan Stanley, Goldman Sachs, BNP Paribas, Nomura, Reliance AMC, Birla Sun life AMC, ICIC I Prudential. So when was the last time we saw something of this kind?
Are there any other companies of this size into Microfinance sector listed in India or elsewhere? Can you think of any other 7000 Crore market cap company which has grown at a CAGR of 176% in the last 4 years and can probably grow at 100% this year? No, there is no company that I can really think of. So, let’s really stop cribbing the issue as expensive and see what’s in it for us.
There is altogether another group which speaks about ethics, super profits, profits from poor and all kind of non sense. These are basically the ones who stand challenged by SKS and its business model; these are the ones who envy the achievements of SKS and basically the ones who saw dust where SKS dug out gold.
SKS Microfinance is coming out with an IPO to raise around 1400 Crore at the lower band of 850 rupees per share and around 1650 Crore at the upper band of 985 rupees per share. The issue consists of a fresh issue of 74.4 lac equity shares and an offer of 93.46 lac existing equity shares from Sequoia Capital, SKS Mutual Benefit Trust, Kismet Microfinance and Mauritius Unitus Corporation. Retail investors get a discount of 50 rupees and one day more than institutions to subscribe to the offer. The offer closes on July 31st for institutional investors and on August 2nd of retail investors.
Leaving out all kind of ratios, numbers and projections that usually complicate things, let us take a look at quite a few things.
SKS is the largest MFI in India and had 2029 branches in 19 states at the end of the FY 10. The MFI has more than 60 lac members and has disbursed more than 10,000 Crore. SKS has the vast infrastructure in place that nobody else has. The kind of reach these guys have will give them an edge over their peers. While some MFI s look at saturating some region before entering another, SKS has concentrated on placing an infrastructure in place. With the branch network and reach in place and with money looking easy flowing, SKS is well placed to generate the maximum out of its infrastructure.
The cost to income of SKS has actually been coming down and the down trend is expected to continue. This would mean that the company can get more and more profitable going forward. It is to be noted that SKS is not really the most profitable MFI and this can change going forward. For instance, the net margins jumped from 14% in FY 09 to 18% in FY 10. With so many MFI s operating in the country across the length and breadth of it, penetrating a new territory and setting up of new infrastructure will prove costly going forward. And SKS need not really worry about this.
With the anchor book demand at 12 times the size of anchor book size, it clearly looks like the stock will trade at a price more than the upper band. At the looks of it, the company will command a market cap of 7500 Crore and that translates into 43 times FY 10 earnings. We expect the earnings to double in the current fiscal and that would mean that the stock would be available at 21 times current fiscal earnings which looks quite OK considering its leadership position and high growth rates that it can come out with. And if you were to look at the stock based on FY 11 earnings, it could be cheaper at 10 or 12 times. So, basically one can invest into this counter with at least a 1 year perspective.
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