SKS Microfinance IPO - Should you subscribe?

SKS Microfinance, India's largest MFI, taps the market for further expansion. The price band for the issue is at Rs.850-985 per share. Book will be remained open till July 30 for QIBs and August 2 for retail & non-institutional investors. Bids can be made for a minimum of 7 equity shares and in multiples of 7 equity shares thereafter. A discount of  Rs.50 per equity share is being offered to applicants in the retail category.

This issue has been graded by CARE as CARE IPO Grade 4 indicating above average fundamentals through its letter dated June 23, 2010.

SKS Microfinace has got 36 anchor investors including some of the big names like Soros, Credit Agricole, Reliance AMC, Birla Sun Life AMC and ICICI Pru Life. The company has secured about Rs 300 crore (USD 64 million) in the process as against allocation of 30 lakh shares at Rs 985 per share.

SKS Microfinance is the largest MFI in India in terms of total value of loans outstanding, number of borrowers (members) and number of branches, according to the October 2009 CRISIL report titled India Top 50 Microfinance Institutions.

The total loans outstanding increased at a CAGR of 162.9% from Rs.78 Cr as of March 31, 2006 to Rs. 142 Cr as of March 31, 2009.

The IPO comprises of a fresh issue and offer for sale for augmenting the capital base to meet the future capital requirements. SKS has expertise in Microfinance and have been focused on lending to poor women in India. It has a superior asset quality. As of March 31, 2010 its net NPAs, was Rs 48.03 million or 0.15% of loans outstanding. It has a scalable operating model and looks to increase its customer base and ticket size in future.

Investment Rationale:

At the lower price band, the stock is priced at 35x trailing FY10 EPS and 6.4x post issue book value. This looks a bit expensive, compared to Global MFIs which are trading in the range of 3.5-4.5x their book value. However, the company has a very robust business model, strong margin profile and return ratios and low NPA’s. Apart from that Government's focus on NREGA can generate the interest for this stock.