Thursday, May 31, 2012

SKS Microfinance-time to buy at book value?

The riches-rags story of SKS Microfinance has been fascinating-be it the borrower 'suicides' induced microfinance bill in Andra Pradesh that reduced the share to less than 7% of its IPO price, the management tussle between the founder and the professional CEO which eventually led to both of them being ousted, and so on. Mutiple case studies could be written on this subject, but I restrict my case here to whether SKS Microfinance is a good asset play. Market perception is that since the bulk of its loan portfolio is in andhra pradesh and therefore irrecoverable, one should wait till the legal clarity is there.

 Earlier, I did get egg on my face by purchasing it at Rs 142(, seeing it dip to less than Rs 100, and then frantically selling it when it touched Rs 147. Given the governance paralysis here, many of the upside triggers I'd noticed then now seem a distant dream. However, when I read the most recent earnings release and investor presentation( and, there finally seems an end to the nightmarish exposure of SKS to Andhra Pradesh. As explained in the earnings update, SKS has written off nearly 1100+crores of its exposure to Andhra Pradesh(thus the bloodbath losses and negative EPS/erosion in book value which has now touched merely Rs 60). However, at market capitalization of Rs 467crores and debt of Rs 1021 crores(adjusting for cash of Rs 690crs), one can get the company at an enterprise value of just Rs 788crores(i.e 7880 million INR). For this, one gets the following assets
  1. Non Andhra Pradesh Loan portfolio of Rs 529crores(deducting Rs 236crores residual Andhra Pradesh exposure from the Rs 765crores advances on books)
  2. Deferred tax assets of Rs 460crores(even say 50% of that is in form of carried forward losses which can be written off for tax purposes, that still gives Rs 230 crores).
  3. and the biggest prize of them all-The Rs 1129 crores of loans to AP borrowers written off in the books, which could become recoverable if the Central Microfinance Bill 2012 becomes law. Of course, this needs recapitalization, political willpower to enact the law, executive support to restore order in the districts, and above all, the borrower's willingness to repay. I feel that loans being overdue for nearly 1.5yrs now, nothing short of a Ponzi scheme(borrowers being extended new loans to induce them to repay existing loans) will obtain repayment, whatever the law may saw. The lack of a rural credit bureau aggravates things further.
Hence, aggregating the assets in (1) and (2), there is very little margin of safety remaining for the investing, and this is certainly not the deep value cigar puffs which Grahan or Buffet would have purchased. Hence, despite the rule of law, I am not optimistic about the microfinance bill giving a Rs 1129 crore windfall gain to SKS and other microfinance companies.

Recomendation- Still, the market is irrational, and does overreact to such announcements. So what I would suggest is to accumulate at book value, and then sell ASAP when the share price zooms on the passage of the MFI Bill 2012, thus exiting the counter

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