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IPO ANALYSIS

SKS Microfinance Ltd Subscribe

IPO STATISTICS
Company Snapshot
Issue Open Date 28th July 2010

Issue Close Date 30th July 2010 Company is the largest MFI in India in terms of total value of loans out-
standing, number of borrowers, that is members, and number of branches, ac-
Price Band Rs 850-985 per Share cording to the October 2009 CRISIL report titled India Top 50 Microfinance In-
stitutions, or the CRISIL Report. Company is a non-deposit taking non-banking
Face Value Rs 10 per Share
finance company, or NBFC-ND, registered with and regulated by the Reserve
Bid Lot 7 Equity Shares Bank of India, or RBI. It is engaged in providing microfinance services to indi-
viduals from poor segments of rural India. Co’s mission is to eradicate poverty.
Issue Size 16,791,579 Eq Shares
Companies provide financial services to the poor and by using its channel to
Fresh Issue 7,445,323 Eq Shares provide goods and services that the poor need.

Offer For Sale 9,346,256 Eq Shares

Pre Issue Equity Capital Rs 645.27 Million

Post Issue Equity Capital Rs 719.72 Million Objects of Issue

The Issue comprises of a Fresh Issue and an Offer for Sale. Company intends to
utilise the Net Proceeds for the following objects:
SHAREHOLDING PATTERN (%)
Pre Issue Post Issue
(a) Augment capital base to meet its future capital requirements arising out of
growth in business; and
Promoter 55.80 37.10
(b) To achieve the benefits of listing on the Stock Exchanges.

Public 44.20 39.60

Company will not receive any of the proceeds from the Offer for Sale.

ISSUE STRUCTURE

QIB 10,074,948 Eq Shares

NON-INSTITUTIONAL 1,679,157 Eq Shares

RETAIL 5,037,474 Eq Shares

OTHER SPECIFICS

Lead Manager Kotak Mahindra Capital

Company Ltd ,
Citigroup Global Markets
India Pvt Ltd

Registrar Karvy Computershare Pvt

Ltd

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IPO Analysis

Business Details
Co’s core business is providing small loans exclusively to poor women pre-
dominantly located in rural areas in India. These loans are provided to such
members essentially for use in their small businesses or other income generat-
ing activities and not for personal consumption. These individuals often have
no, or very limited, access to loans from other sources other than private
money lenders that typically charge very high rates of interest. Company util-
ize a village centered, group lending model to provide unsecured loans to its
members. This model ensures credit discipline through mutual support and
peer pressure within the group to ensure individual members are prudent in
conducting their financial affairs and are prompt in repaying their loans. Fail-
ure by an individual member to make timely loan payments will prevent
other group members from being able to borrow from company in the future;
therefore the group will typically make the payment on behalf of a defaulting
member or, in the case of wilful default, will use peer pressure to encourage
the delinquent member to make timely payments, effectively providing an
informal joint guarantee on the member‘s loan. Company also use its distribu-
tion channel to help provide other services and goods that it have found that
members need. For instance, company also distribute and administer life in-
surance policy products for its members and have pilot programs to provide
loans to its members to purchase select consumer products that increase their
productivity. In addition to co’s market leadership position and the expertise
in microfinance which company have developed, co’s competitive strengths
include its scalable operating model which leverages technology, diversified
product revenues, diversified sources of capital and its pan-India distribution
network. Co’s strategy is to further expand its membership, loans and prod-
uct offerings by relying on these strengths. Company continue to finance its
expansion by accessing multiple sources of capital, both debt and equity, in-
cluding listed debentures, priority sector qualifying loans from banks, and
equity investments from venture capital and private equity investors, institu-
tions and others. Additionally, company seek to sell or assign its portfolio
loans to banks to improve its financial position and finance its growth.

Industry Overview
Microfinance offers poor people access to basic financial services such as
loans, savings, money transfer services and micro insurance, according to
the Consultative Group to Assist the Poor, or CGAP, an independent policy
and research organization. The industry emerged to alleviate poverty on
the premise that poor people, like everyone else, need a diverse range of
financial services to run their business, build assets and reduce vulnerabil-
ity to fluctuations in their income. The ultimate goal of microfinance is to
enable the poor to build assets, increase incomes, reduce vulnerability to
shocks and economic stress and improve quality of life by enabling better
access to education and healthcare. The microfinance industry has grown at
a rapid pace across the world and has created a positive impact in the lives
of millions of poor people.

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IPO Analysis
Market Leadership
Superior Asset Quality
Diversified Sources of Revenue
Operational Risk
Stiff Competition
For Private Circulation Only
Investment Rationale
According to the CRISIL Report, company is the largest MFI in India in
terms of total value of loans outstanding, number of borrowers, and
number of branches as of September 30, 2008. As of March 31, 2010,
company had approximately 6.78 million members, 2,029 branches, a
presence in 19 states and loans outstanding of Rs. 29,367.20 million.
Company have developed a unique model to ensure that its loans are
repaid on time and with a low rate of default, given its high rates of
portfolio growth. As of March 31, 2010 co’s net non performing assets,
or NPAs, was Rs.48.03 million or 0.16% of its loans outstanding. In ad-
dition to traditional tools such as disciplined credit processes, and
credit verification, co’s product structure, sales and collection process
and segment specific approach are designed to result in a higher re-
payment rate for its loan portfolio.
As of March 31, 2010, company had 2,029 branches in 19 states across
India with no state accounting for more than 28.8% of its outstanding
loan portfolio. While co’s core business is providing members with its
traditional loan products, company also offer other loans like produc-
tivity loans that are designed for purchase of goods that enhance the
productivity of co’s members. Company also offer access to insurance
products and loans to finance them. Such other products have different
pricing structures and payment terms which allow it to diversify and
increase its revenue streams and revenue base.
Concerns
As company handle cash in a high volume of transactions occurring
through a dispersed network of branches and Sangam Managers, it is
exposed to operational risks, including fraud, petty theft and embez-
zlement, which could harm its results of operations and financial po-
sition.
Company face most significant competition from other MFIs and
banks in India. Many of the institutions with which company com-
pete have greater assets and better access to, and lower cost of, fund-
ing than company. In certain areas, they may also have better name
recognition and larger member bases than company. Company an-
ticipate that it may encounter greater competition as it continue ex-
panding its operations in India, which may result in an adverse effect
on company’s business, results of operations and financial condition.
3 Hem Research
IPO Analysis

Annual Financial Matrix

Rs Cr

Particulars FY07 FY08 FY09 FY10

Interest Income 44.50 162.47 506.07 873.57

Growth% --- 265.13 211.49 72.62

Other Income 1.17 7.54 47.93 85.36

Net Income 45.67 170.01 554.00 958.93

Growth% 359.23 272.29 225.87 73.09

Operating Expenditure 39.10 136.86 416.53 639.51

Pre Provision profit 6.57 33.15 137.47 319.42

Growth% --- 404.50 314.68 132.35

Provisions 2.03 4.21 13.42 51.72

PBT 4.54 28.94 124.06 267.70

Tax 2.33 12.37 44.36 92.86

Adjusted PAT 2.21 16.58 79.69 174.84

Growth% --- 651.36 380.80 119.39

Equity Capital 26.64 44.33 47.90 64.53

Net Worth 71.39 212.18 663.96 950.32

Ratio Analysis

Ratios FY07 FY08 FY09 FY10

Gross Yield% 24.65 25.63 31.59 28.30

Portfolio Yield% 23.44 23.94 28.43 25.31
Financial Cost Ratio% 7.48 8.51 11.09 8.51
Operating Cost % 13.63 12.12 12.67 10.36
GNPA% 0.12 0.20 0.34 0.33
NNPA% 0.05 0.16 0..18 0.16
Cost To Income ratio 79.34 70.80 61.77 52.36
CRAR 24.65 24.73 38.69 28.32

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IPO Analysis

Valuation

The company is bringing the issue at price band of Rs 850-985

per share which will turn into p/e multiple of 31-36 at FY10
Eps of Rs 27.10. The company operates in high growth industry
and has shown strong financial performance from last few
years. The topline as well as bottomline of the company has
witnessed the CAGR of more than 100% from FY08 to FY10.
The company being one of the leader in Microfinance industry
has high growth potential in future. Hence we recommend in-
vestor to “Subscribe” the issue.

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