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Shares of SKS Microfinance are trading down 12.5 per cent as analysts have downgraded the ratings on the stock and some have also sharply cut its target price after the company was not given the small bank licence by Reserve Bank of India on Wednesday in contrast to many of its peers.
Phillip Capital and Kotak Institutional Equities have downgraded their target price on the stock by 35 per cent and 28 per cent respectively, while Emkay Global Financial Services has downgraded its rating on the shares to ‘hold’.
Phillip Capital's target price on the stock is Rs 415, and that of Kotak Rs 420.
The small bank licence given to the 10 applicants, of which eight are microfinance companies, have changed the perception towards the microfinance industry and improved the prospects of the players. Thus brokerages still remain upbeat about the future of SKS Microfinance, listed pioneers in the sector.
Kotak, which has retained its ADD rating, believes that the risk perception towards the microfinance sector will reduce over a period and this will indirectly benefit SKS.
"Growth potential remains unchanged for SKS in the near term as AUM and earnings CAGR of 46 per cent and 35 per cent over FY15/18E with superior profitability of ROAs of 4 per cent-plus and RoEs of 20-24 per cent remains intact," said Emkay in a note today.
However, a cut in the target price and/or downgrade of ratings, is only due to uncertainty over incremental growth prospects as analysts had considered the possibility of the company getting a small bank licence.
"It is an opportunity lost for SKS; we believe SKS’s MFI model remains robust though its competitors are now better positioned," said Kotak in its note.
Phillip Capital pointed out that the ability to attract equity capital would increase for these microfinance entities turned banks, which is imperative for growth in the microfinance business. "Hence, the micro finance space may be overcrowded, thus, raising concerns on the long-term growth prospects for SKS Microfinance, it said.
Also with new players getting strength, SKS may lose its premium valuation and also may have to rethink on its differentiation strategy.
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