We estimate 65% EPS CAGR for FY14-17, with an average ROE of 23%, the best in our coverage, which should help sustain, if not re-rate, valuation. Regulatory and credit bureau moves to improve business sustainability should also benefit SKS.
India?s microfinance industry holds $90 billion demand potential. Only 15% of this is being addressed, implying strong growth, especially as new rules have quelled concerns of borrower overleveraging, high pricing, and process dilution. Credit bureaus have also improved underwriting, reviving funding lines.
SKS operating across 15 states, and the sole large Andhra Pradesh-based MFI lender not to restructure its debt since the industry?s 2010 downturn, faces a favorable landscape, as new industry rules benefit large and diversified MFIs. Loan spreads, for example, are now capped at 10%, so lowering operating costs are key to raising ROA, and the rules also restrain competition in mature states. Given SKS? 40% tier 1 capital ratio, we expect it to achieve a high 37% AUM CAGR, FY14-F17.
SKS is our top NBFC pick along with IDFC. SKS? medium-term growth and ROE (best in our coverage) should drive share price performance in a stable macro climate. Within our coverage, we prefer private banks and NBFCs (in that order) to SOE banks. Our 12-month price target at 3.3x one-year forward P/B and 16x P/E, implies little re-rating. We maintain overweight rating on the scrip.
Morgan Stanley
