and reduced competitive fervor have improved the risk perception of MFI sector over past few quarters. Funding environment continues to improve and disbursement CAGR of 36% will drive AUM CAGR of 36% over FY14-16E. Operating leverage benefits will continue to accrue as growth accelerates propelling earnings CAGR of 76% over FY14-16E.
We maintain BUY with twelve month price target of Rs 228/share, which implies an upside of 34%. We value the core business at Rs 199/ share (8.5x FY16e earnings) and the DTA at Rs 29/share. Another Andhra Pradesh like event remains the key risk, which gets completely mitigate once the MFI Bill 2012 get passed.
Growth kick-starts, funding environment benign
Drawdowns for 9MFY14 at Rs 17.9 bn were 53% higher than 9MFY13 levels. SKS completed securitization transactions to the tune of Rs 6.7 bn over 9MFY14. SKS kick started growth through a combination of reaching out to new borrowers as well as lending higher amounts to existing borrowers (avg. outstanding per borrower improved from Rs 7,244 to Rs 7,775). Leadership position across India coupled with expanding borrower base will enable 36% AUM CAGR over FY14 16e
Gains from improved efficiency to accrue soon
Average loan book per loan officer improved sharply from Rs 4.2 mn in Q2FY14 to Rs 4.9 mn in Q3FY14. Given the tight leash on branch network expansion and employee additions, we expect cost-to-income ratio to improve from the current 75% levels to 55% over the next five quarters. This will drive pre-provisioning profit CAGR of 86% over FY14-16E.
Earnings recovery to sustain, maintain BUY
Stable regulatory framework and robust processes has enabled collection efficiencies for 99.5%+ over the past four quarters. This coupled with the policy of lower exposure to risky states and well defined concentration norms will ensure lower credit costs over FY14-16e. We expect earnings CARG of 76% over FY14-16E driven by robust AUM growth, gains from operating efficiency and low tax rates. MAT @ 21% will kick in late FY15, post which SKS would generate RoAUMs of ~4% and RoEs of ~24% on a long term basis.