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After declaring a loss in the fourth quarter, after market hours on Friday, the stock of SKS Microfinance plunged 18.3 per cent on Monday.
The Rs 70-crore loss was due to higher provisioning, a 25 per cent decline (sequentially) in the loan book, and lower interest spreads.
These factors resulted in the loss and the consequent fall in stock price. The market is also concerned about further surprises — uncertainty on the regulatory front (Andhra Pradesh versus the RBI) and non-performing assets (due to moral hazard).
The collection efficiency in Andhra Pradesh plunged to 10.5 per cent in March 2011 from 43 per cent in December 2010.
While this has spooked investors, the fact that Andhra Pradesh continues to contribute a fifth of future receivables is a further cause for concern.
This may prompt larger write-offs until the company starts recovering these from borrowers. The collection efficiencies at other centres have also fallen during the March quarter as against the December quarter.
The ratio in West Bengal (the second largest contributor) fell by close to 5 percentage points sequentially while other major contributors to the loan book also witnessed some decline in the ratio.
Financials
The gross yields (excluding reversal in income from AP) fell to 24 per cent from 29.8 per cent in the December quarter, partly due to cut in overall lending rates by SKS. This, coupled with the rising cost of funds, put pressure on the margins.
Additionally, the disbursements in SKS declined by 66 per cent year-on-year for the fourth quarter.
The lending book shrinking also led to SKS's borrowings falling and its reliance on stable capital increasing. While the income fell, operating costs didn't keep pace, despite the rationalising of staff and branches. In the long-run, scaling down of operations would also limit the loan growth.
Outlook
SKS currently trades at 1.1 times its March 2011 book value.
If SKS continues to post losses this year and the lending business does not scale up outside of AP, it might continue to trade at these depressed valuations. Especially as the borrowing costs stay firm and lending institutions are wary of funding MFIs.
Where SKS could see a favourable development is on the RBI recommendation allowing MFIs to charge a higher rate (26 per cent against 24 per cent under the AP MFI Act). The management claims that it is fully equipped to comply with the Malegam committee report on microfinance.
SKS is also planning to diversify from microfinance to lending against gold — the model which is in vogue now.
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