SKS: An image makeover won't solve its valuation problem

A lot has happened in SKS Microfinance since Dr Vikram Akula quit the company he founded.

Battered by low recoveries on its loans in Andhra Pradesh, the company had to take a huge hit in its balance sheet. Since March 2011, the microfinance company has booked losses of Rs 1,100.8 crore, wiping out nearly 60 percent of the funds raised during its initial public offer of Rs 1,628.78 crore.

[caption id=“attachment_204809” align=“alignleft” width=“380” caption=“Currently SKS has a presence in 19 states. However, the progress in any of these states is not as fast as seen in Andhra Pradesh.”]  [/caption]

Since the enactment of the Regulation of Microlending Act in October 2010 in Andhra Pradesh, the company has been prevented from sending recovery agents to recover their loans.

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That allowed borrowers not to worry about defaulting on their loans, to the detriment of SKS’s profitability. As a result, the company has seen a significant part of its Andhra Pradesh portfolio wiped out. SKS Microfinance lost nearly one million borrowers from October 2010 to September 2011. The number is expected to have gone up since then.

The immediate fallout has been a sharp reduction in its employee base, which has come down from 27,709 in October 2010 to 17,854 in December 2011. The company has reduced its branches from 2,379 to 1,765 during the same period.

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The loan portfolio had also been pared to Rs 1,810 crore by December 2011from a peak of Rs 4,321 crore in March 2010 .

Currently, SKS has a presence in 19 states. However, none of these states have the same kind of growth as Andhra Pradesh.

Given the slowdown in growth, the company then decided to move into other avenues of finance. It started gold loan financing, mobile instrument financing and selling insurance, housing loans and loans for kirana shop owners among others. In other words, SKS is increasingly adding a host of non-microfinance products to its portfolio.

In terms of meeting its financing needs, SKS has managed to raise money through two sources after struggling for nearly a year. It managed to raise Rs 100 crore as a loan from SIDBI, albeit at a high interest rate of 13.5 percent. Today, the company announced it had raised another Rs 243 crore by securitising the cash flows of its non-Andhra Pradesh portfolio.

These measures have helped in portraying the image that the company is still bankable and that most of the problems arising out of its Andhra Pradesh portfolio have been taken care off.

Enlisting professionals like Verghese Jacob, who used to head another successful microfinance company, as its ombudsman has also helped the company improve its severely battered image.

While these measures might help the company’s survival, from the investors’ point of view, what needs to be remembered is that SKS Microfinance enjoyed a higher discounting because it was the only listed microfinance company. Being listed helped the company enjoy higher spreads – the difference between the cost of funding and lending rate.

But with the company now focusing on non-microfinance segments, it will be valued like any other non-banking finance company.