Kotak, shockingly, puts an ‘Add’ rating on SKS Microfinance; it’s not alone

As the controversy surrounding SKS Microfinance intensifies, Kotak Institutional Equities Research has written a very positive note on the stock with an ‘Add’ rating. Citi, Centrum, and CSFB are also positive on the stock. Internet forums are divided on the issue while mutual funds are tight-lipped

Kotak Institutional Equities Research has a positive view on the SKS Microfinance stock. Credit Suisse First Boston (CSFB) and Citi, too, have come out with positive notes on the stock, that too after the controversy about the sacking of SKS’s CEO Suresh Gurumani broke out last week.  Internet forums are divided on whether the sacking of the CEO will necessarily lead to a further fall in share prices and not everybody believes there are skeletons in the SKS closet. However, the forums seem to agree that the political fallout of the issue (on the high interest rates charged to farmers and people of the low-income group) could be the biggest threat to the stock.
A brief background...
SKS Microfinance, which claims to be India’s biggest microfinance institution, made its debut on the Bombay Stock Exchange (BSE) in August. Its founder and CEO, Vikram Akula, claimed that the initial public offering (IPO) was done to raise more funds so that SKS could reach out to a larger number of poor people. This logic has been questioned time and again—how could SKS juggle the dichotomy of being a listed company, that is, maximising profits for its shareholders, and yet serve the poor effectively? Several comments about its overhyped IPO also appeared in the press. But hell broke loose only in early October when SKS abruptly terminated the services of its managing director and CEO, Suresh Gurumani, without giving any specific reason. The Securities and Exchange Board of India (SEBI), reacting uncharacteristically fast, asked the board to justify its action.

SKS Branch Network: Highest concentration in AP

(Source: Citigroup Global Markets report dated 5th October citing company reports)

Moneylife has been actively writing about SKS Microfinance for a long time now. 

 The earliest article in July 2010 questioned the IPO premium and raised other issues such as the commitment of the top management, high remuneration paid to top executives, geographical concentration of business and the mismatch in its assets and liabilities. (See: http://www.moneylife.in/article/81/7674.html).
Since the controversy, Moneylife has also written several articles about this issue: 

 What brokerages say
Despite the possibility of a political backlash and chances of the controversy snowballing, brokerages have staunchly endorsed the stock.
Kotak Research wrote in a note today, “We believe SKS Microfinance is well-positioned to capture the latent demand in microfinance. A meticulously-planned and scalable business platform, proven track record of maintaining low NPLs and proactive management will likely drive 60% loan book CAGR between FY2010 and FY2013E. We initiate coverage with an Add rating and target price of Rs1,400.”
Credit Suisse First Boston brought out a post-conference call note on the stock on 5th October which said that growth momentum continues to be strong and management has guided for 80% FY11 net profit growth (targeting 77% y-o-y growth in disbursements) and that it does not see any of the potential regulatory changes as a threat to its business model/profitability. CSFB said that it is expecting 1H11 profits of Rs1.5 billion, a 165% y-o-y growth, and that “though the sudden management change is likely to remain as an overhang in the near term, we believe the strong earnings shall act as a support for the stock. With a Tier-I of 42%, SKS is well placed for strong loan growth for multiple years and with high ROAs (6.5%-7%) we maintain Outperform (target price of Rs1,575).”
Centrum, in an 11th October report, provocatively titled "Greed is Good!", says microfinance Institutions are in a sweet spot and that SKS with its 'excellent scalable' business model is right there to lap up the opportunity. Citi, too, expects the stock to rise above Rs1,400. 

SKS's split of loans by state

(Source: Citigroup Global Markets report dated 5th October citing company reports)

What internet forums say
Internet forums are divided as usual. Some members are calling Akula a crook, while others believe that nothing will come of the whole thing. The optimists point at the company’s share price which has not really fallen off the cliff since the controversy broke out. It is still above its debut price.

 They also point to the low NPA levels in the company, its high 'reach', and the fact that no financial irregularities have been found so far.

Many expect high political drama over the issue. There have been suicide deaths related to microfinance loan repayments in Andhra Pradesh and today the state government approved a special ordinance to deal with the worsening situation. It has been reported that Spandana Spoorthy, the second-largest Indian microfinance company in terms of assets, may be delaying its IPO.
The mutual fund industry is quite tight-lipped about the whole issue. Birla Mutual Fund, Kotak, and UTI have holdings in SKS.
According to the BSE, Indian promoters hold 11.6% of SKS, foreign promoters 25.5%, foreign institutional investors 17% and domestic institutions 6% as of September. Several prominent foreign and Indian funds hold more than 1% in the company. Some of the names are:

  •      Sandstone Investment Partners: 11.59%
  •      Kismat SKS II: 5.08%
  •      Small Industries Development Bank of India: 2.51%
  •      Bajaj Allianz Life Insurance Company: 2.31%
  •      Tree Line Asia Master Fund (Singapore): 2.07%
  •      Quantum: 1.70%
  •      Smallcap World Fund INC: 1.35%
  •      ICICI Prudential Life Insurance Company: 1.03%

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).



k a prasanna

7 years ago

Those are all paid research reports. SKS is the biggest bubble in stock market.


7 years ago

Citi and Kotak were the BRLMs for IPO.


7 years ago

Hi All,
It is sad that everybody who does not understand what MFI means to rural poor, are commenting on the subject ..It is another Peepli Live being made .. It was well said by some one that MFI is threatened by 4 Ms.. MLAs, MAFIA, Marxists and least but not the least MEDIA ... that is what seems to be happening ..
Agree that there are cases on conduct of few rogue MFIs.. but can't paint all with the same brush.. We would be doing more harm to rural poor than good if we snap the credit line to rural market ..from MFI.. Pls remember that we have 80% of our population that still remains unbanked ..( even after 63 years of independence )
Hope I make my point !

R Balakrishnan

7 years ago

Equity Research is all nonsense, especially when it comes from the 'sell' side (brokers). They are not accountable and the firm needs business from the companies. And what if the proprietory book holds the stock? Brokers opinions are like elbows. Everyone has two of them.
Having spent some time on the sell side, I know the problems in putting a sell report on a stock.
On SKS, it takes courage to put otherwise.One way to look positively is that the co has got rid of a highly paid CEO it never needed in the first place. So, profits will go up.


Munira Dongre

In Reply to R Balakrishnan 7 years ago

Dear Balakrishnan,
I do agree with most of what you say, especially about the prop book holding stock. And I appreciate the difficulties that brokers face in putting out a sell report. I have known instances when a broker has put out a report with a 'hold' and then gone ahead and marketed it as a sell.

However, it is surprising that Kotak has actually initiated a report at this stage on SKS. It could, after all, have done nothing since it did not cover the stock.



7 years ago

SKS stands for Soft Killing...Stupid!

Godrej Consumer Products board approves merger of GHPL

New Delhi: Godrej Consumer Products (GCPL) today said its board of directors has approved the merger of Godrej Household Products Limited (GHPL) with itself, reports PTI.

The company said the merger subsequent to GCPL's acquisition of 51% stake in Godrej Sara Lee (GSLL) from erstwhile partner Sara Lee Corp, will be applicable with retrospective effective from 1 April 2010.

After the acquisition, GSLL was renamed as Godrej Household Products Limited (GHPL).

"The merger of GHPL with GCPL is an important milestone in our aspiration towards becoming a leading emerging markets FMCG company," GCPL chairman Adi Godrej said in a statement.

The company said a dedicated programme office has been set up as part of the integration process.

"Over 100 of our team members are working very hard in cross functional teams to cross pollinate ideas, to share learnings and to chart the path of a bigger and better GCPL.

This intensive effort has been code-named Project Neo," GCPL managing director A Mahendran said.

After the integration, GCPL will now sell personal care and household insecticide brands including GoodKnight, Cinthol, Godrej No 1, Expert, Hit, Jet, Fairglow, Ezee, Protekt and Snuggy, among others.

"The merger will provide us with significant strategic and operational benefits. Both GCPL and GHPL have delivered outstanding performance and we believe that the merger provides us with a scale platform to accelerate our growth and profit trajectory," Mr Godrej said.

According to analysts, the integration of the two firms will help in bringing more synergies in terms of its distribution and marketing.

"There has been synergy already between the two firms, it will be higher now whether in their distribution channel or marketing," an analyst with Angel Broking said.

"They will have a bigger basket of products to offer.

Besides, there might be certain things, which were overlapping. It will help in overcoming that and help in cost saving," he added.


Personal finance Thursday

Reliance Life Insurance launches new ULIP; Regional Rural Banks to open no-frills accounts for minority students: RBI; SEBI extends ASBA facility; Credit cards transaction up nearly 29% in August 2010

Reliance Life Insurance launches new ULIP

Reliance Life Insurance has introduced a new unit-linked insurance plan (ULIP) called Reliance Life Insurance Highest NAV Advantage Plan. The new ULIP offers guarantee on maturity with the highest net asset value (NAV) per unit achieved during the entire 15-year policy term. The Plan pays the beneficiary double the sum assured plus total fund value in the event of accidental death for the base cover portion. The unique Plan also offers the benefit of up to 100% equity exposure during the policy period. The plan, which is available for customers in the age group of 7-65 years, also provides liquidity through partial withdrawals after fifth policy anniversary and loan after the completion of second policy year and top-up option to the policyholder.

Regional Rural Banks to open no-frills accounts for minority students: RBI 

To check discrimination against students from minority communities, the Reserve Bank of India (RBI) on 13th October has asked the regional rural banks to facilitate opening of no-frills accounts, which could be opened with bare minimum or no deposit, for such students seeking scholarships.In a notification issued, RBI said the Ministry of Minority Affairs had brought the matter to its notice. The RBI said, "It has been brought to our notice by ... Ministry of Minority Affairs that banks are not opening 'no-frills' accounts in favour of students from minority communities who wish to avail of the scholarships ... This is causing hardship to the applicants for scholarship schemes of the government and is inviting criticism."It added: "You (Regional Rural Banks) are advised to ensure opening of no-frills accounts or other accounts for students from minority communities and other disadvantaged groups to enable them to avail of various scholarships or other benefits offered by the government."In its annual policy statement of 2005, RBI had asked all to make available a basic banking 'no-frills' account either with nil or very low minimum balances as part of its financial inclusion project. Minority students are one of the focus groups for the purpose.

SEBI extends ASBA facility

The Securities and Exchange Board of India (SEBI) has allowed syndicate/sub-syndicate members to collect Applications Supported by Blocked Amount (ASBA) forms from the investors and to submit it to Self Certified Syndicate Banks (SCSBs). Earlier only SCSBs were allowed to collect ASBA forms, while the syndicate/sub-syndicate members collected the non-ASBA forms. Under the new scheme syndicate/ sub-syndicate members would be required to upload the bid and other relevant details of such ASBA forms in the bidding platform provided by the stock exchanges and forward the same to the respective SCSBs. SCSBs should carry out further action for such ASBA forms such as signature verification, blocking of funds etc and forward these forms to the registrar to the issue.

Credit cards transaction up nearly 29% in August 2010

Transactions worth Rs6,259.4 crore were carried out in the country by credit cards during the August-month, a growth of 28.9% from the figure recorded in the same period last year.Credit card transactions during August 2009, were at Rs5,817.5 crore, according to the figures released by the Reserve Bank of India.
The number of credit cards in circulation have, however, declined by nearly 14% to 1.9 crore as on 31 August 2010, from 2.2 crore in the same period last fiscal.
During the first five-months of the fiscal, the total transactions carried out via credit cards increased 18.8% to Rs29,024.8 crore, as against Rs24,427.3 crore in the April-August period of 2009-10.Meanwhile, debit card transactions in August was up by 42.3% to Rs3,321.1 crore, as against Rs2,333.5 crore in the corresponding month last year. There were 20 crore debit cards in use in the country as on 31 August 2010, up over 29% over the figure of 15.5 crore in the year-ago period. In April-August period, the total transactions carried out by debit cards jumped by 44.2%, to Rs14,288.6 crore, from Rs9,911.9 crore in the first five-months of the last fiscal.


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