Sunday, November 7, 2010

Micro-Finance To Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!


SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of  micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days.

Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week.

Much water has flown under the bridge since. The script is presently very weak both technically and fundamentally.

Technicals

 
The upper chart illustrates that the predominant trend is steeply down and the probability of the share crossing Rs 1,000 again is likely to be nil. The lower chart compares SKS price movement with those of the Mumbai Sensex. Even when the Sensex trend shows a firmly bullish trend, those of the SKS script is clearly moving in the reverse direction. Both charts show a classical bearish pattern of the SKS share. So bearish, that even when penny stocks gained during the Diwali trading session, SKS still ended up in the negative. Candlestick analysis has similarly given a clear bearish confirmation and all technical indicators give a sell signal.

Since it’s a new stock without a price history, it is difficult to guess what its next support level is. Its historic low is Rs 890 though this cannot be considered a firm support level since the script was hammered there from levels of 1,490, its historic high, a fall of 33%.  By then bears made a killing and covered their shorts as the market tentatively greeted favourably SKS decision to cut back their peak interest rates by 2% and with Narayana Murthy, founder of Infosys, rushing for a hastily convened Board Meeting to firefight the situation. As on 5th November, SKS closed at Rs 992, giving it a P/E of 36.8. Trading volumes have become thin and therefore not a reliable indicator of its actual value.

As seen from the table, SKS has been steadily losing its value over the last one month after the MFI was tainted with allegations of being linked to borrower suicides and problems related to governance became public. During the last week, it began to move increasingly within a narrow band and we should be expecting a swift and sharp downward breakout very shortly.

So what could be its next price support level? An informed guess could be Rs 637 - the price Vikram Akula sold part of his holdings to Tree Line Asia, the Singapore Hedge Fund. Assuming annualised earnings per share (EPS) of 30 on an expanded equity base and price-earnings ratio of 20, this places the share value around Rs 600. So most probably, it is within the range Rs 600-630 which the script is most likely to move next. But depending on the import and quantum of bad news flow, even this support level may look very weak.

While there is no disagreement that the script is a bear’s delight, what queers the pitch is the falling volume, which limits freedom to exit.  In the last trading session, just 12,527 shares changed hands, mostly delivery selling. This is just 4% of the 28,738,066 shares with non-institutional shareholding of SKS and a fraction of 1% of total shareholding.  Compare this figure with the brisk trading of  the share in its first hour of trade - 97.71 lakh shares or approximately 58% of the IPO size has been traded! That's how illiquid level it has fallen.

From its listed price of Rs 985, the share skyrocketed 1,490 on large volumes suggesting retail investors who bought the share post listing are sitting tight with huge losses and haven’t made up their mind yet whether they want to dump it or wait for a miracle trend reversal giving them an exit opportunity to avoid losses.

But as MF industry stumbles from one crisis to another, almost everybody would have by now reconciled to the fact they are holding on to a dud share. Now, if they are not allowed to exit, then investor anger builds up. This does not augur well for any future IPOs that the industry plans to follow. On the other hand, panic selling can open the floodgates and then we can see a free fall for the share.
 
Fundamentals

1.  Fund flow affected: Private equity firms feel that the flow of funds to the MF sector would be affected. Vikram Utamsingh, executive director & head of the private equity group at KPMG India, said private equity investors would be very wary about putting money in an industry where business ethics have been questioned. Read more here. 

2.  Poor Governance: Just 6 weeks after the successful debut, the man in charge, CEO & Managing Director Suresh Gurumani was given the boot by the company’s board. “I think we are seeing for the first time a listed company acting like a privately held fiefdom”.  Read more here. Gurumani went to court and got a stay, until an extra ordinary general body of shareholders ratifies the Board of Governor’s decision. Read more here. SKS is likely to announce this week the timing of this EGM. As and when this is held, this would be messy and dirty linen washed in public that further reinforce SKS poor governance public perception.

3.  Crisil to re-rate the sector downwards: "But the biggest micro-finance irony came from rating agencies like CRISIL, which informed the market that they are re-assessing the generous credit rating they had given to many MFIs. Though CRISIL, a Standard & Poor’s company, deserves some credit for always keeping some reservations about the socio-political risks the MFIs faced, the moot point is what kind of an expertise is involved in re-evaluating the ratings much after even the smallest investors have re-evaluated companies like SKS Microfinance. Now, the real paradox is whether Indian rating agencies themselves will get regulated and re-rated due to the MFI rating fiasco, much like how the US rating biggies like S&P, Moody’s, & Fitch came under scrutiny for indirectly causing the sub-prime housing finance crisis. The Indian agencies were already facing some potential regulatory heat before the MFI house of cards started tumbling." Read more here.

4.  Increased bureaucracy: Starting this week, Micro-finance Institutions (MFIs) in the state will be required to double check with this database and ensure that a potential borrower has repayment capability and does not get multiple loans. MFIs operating in other states will have to follow the database from January 1, according to the Microfinance Institutions Network (MFIN).  This increased bureaucracy practically cripples the growth rate of MFI.

5.  Ordinance: The Andhra Pradesh government has introduced a Bill making mandatory for MFIs to register before lending to borrowers. Alok Prasad, CEO, MFIN said, “The registration process was very onerous, that needs to be simplified and rather that doing it across each single district with the government authority it should be at the state capital level. It should not be on an annual basis and may be five years and a review after that. So firstly registration, second is vis-à-Vis the clients themselves where I think the government’s rules are very anti-client. For example repayments can happen only at the Gram Panchayat office which means the client has to walk long distance, loose whole day; wages may be in the process.” Read more here.

"While coercion will be a crime of sorts, leading to a punishment of up to three years, the MFIs will also have to disclose the interest collected to the authorities on a monthly basis. The government will also set up fast track courts to try the violations of the MFIs.  This means no more usurious rates and mega profits. Repayment rates will drastically come down, affecting net profits”. Read more here. A worse nightmare, the governments of Karnataka and Orissa have announced to bring similar bills and this is likely to tempt more state governments to follow suit. Read here and here

6.  Repayment Plunges: On an average, the Hyderabad-based SKS collects dues of Rs 28 crore a week, and around 38 per cent of its business comes from the State. The company could neither collect dues nor disburse new loans in some regions, as its employees were not allowed into the villages. Read here. To make things worse the festival season is typically the peak season for micro-finance institutions (MFIs), as people buys things ranging from new clothes to crackers and small-scale manufacturing and trading activities need greater cash flow. Because of all controversy, MFIs were not able to capitalize as they did in previous years. Read more here. This rings the death knell for the micro-finance industry, as it will make the recovery of tiny loans very difficult.

7.  Human Rights Commission probe: The police have booked at least 70 cases across the state against representatives or affiliates of micro finance institutions, hardly a week after promulgation of AP Micro Finance Institutions (Regulation of money lending) Ordinance, 2010.) Read here. The State Human Rights Commission, on Tuesday, issued notices to 4 District Collectors and Superintendents of Police, directing them to submit a comprehensive report on the exploitation and harassment of microfinance institutions in tribal areas. According to sources, the Commission, taking Suo Motu notice against the exploitation of tribals and farmers and luring them into taking loans at hefty interest rates, directed district Collectors Superintendents of Warangal, Anantapur, Karimnagar and Rangareddy to submit a comprehensive report on the affairs of microfinance institutions (MFIs). Read more here. . This report should be ready by this week and as and when it is released could be a trigger for panic selling.

8.  Competitive Political bashing: Not only the government but the main opposition party has joined in MF bashing. Chandra Babu Naidu, ex-chief minister said "Don't repay your loans till the interest rate is brought down to three percent as promised by the government. If MFI agents harass you for repayment, tie them up in a room and call the TDP workers for support," addressing a public meeting at Uppal. The growing public ire against the rising incidents of suicides saw offices of SKS Microfinance being targeted by irate groups across the state. Read more here.  As politicians in other states realise that MF bashing is a vote winner, Naidu’s antics can be expected to be replicated all over the country!

9.  Net Margins to Be Double Squeezed: First a Working Committee recommended exclusion of bank loans to NBFCs from the Priority Sector Lending (PSL) category and then the Financial Services Secretary wrote a letter to banks urging them to “ensure that the rates of interest charged by the MFI to eventual beneficiaries are at reasonable level, say around 22-24% per annum”. The latest in this chain has been the exclusion of the Non Banking Financial Companies (NBFCs) from the list of entities to be engaged as Business Correspondents by Banks and deprive them of priority lending status. Read here.

10.  SKS not to get banking license: One of the reasons why SKS attracted a whooping P/E was the expectation that it could get a banking license. The Finance Minister sprung a surprise in his Budget speech when he announced that RBI is contemplating issuing additional banking licenses to private sector players.  All 10 top MFIs were eyeing for this licenses. It makes perfect sense for a Micro-finance Institution (MFI) to take a plunge into full service banking as it reduces the cost of capital by half. Currently, a Micro-finance Company musters capital at a cost of 11-13 per cent, but once transformed to a bank the cost would substantially reduce to 7-8 per cent. But with this scandal exploding, this dream has gone up in flames Read here

 We further encourage readers to visit two excellent postings by the blog Finance Mortem. In a post dated 9th April 2010 titled “Commercially Yours, SKS Micro-finance IPO”  and 24 December 2009 titled "SKS Microfinance IPO: A Zealot’s Dilemma". This makes the following conclusions:

  • That the IPO is priced undeservingly high.
  • That book building process has been manipulated by finance sharks in the board of SKS  to jack up valuations.
  • That Vikram Akula is just a fall guy in this whole controversy - A group of four PE investors of SKS, replaced Mr Vikram Akula (founder of SKS), as promoter of the firm (reported on 11th March, 2010).
  • The IPO has been brought about at the behest of the PE investors of SKS as a major chunk of the issue proceed is used to give exit to the PE investors at inflated levels.
  • The IPO merely provides an exit route to existing investors, then the entire process will be a shareholders’ re-organisation exercise rather than being an alternative and meaningful fund-raising activity.
  • The Government and the Regulator are in the process of finalizing the regulatory guideline for the sector.
  • Many social investors believe that it is a profiteering mentality to rush for an IPO before the regulations come into effect. The prudential practice would have been to first prove that the company and its business model can withstand the regulatory environment and then come up with an IPO. The sheer credibility that regulation brings in will attract more investors to the IPO.

VCircle blog in their post of 11th November 2008 interviewed Vikram Akula and this is what he said: "SKS has raised funds from Sequoia Capital, Vinod Khosla, Odyssey Capital, Silicon Valley Bank and others. Talking about the exit route to the investors, Akula said its likely to be through an IPO. But they have other options like mergers and acquisitions on the table. Also the investors are likely to get a return of 20%"  

Here's the confirmation from the horse's mouth that such an exit for investors were being planned as far as two years ago. The investors did more than 20% return. They took more like 20 times multiples of their investment. This is valuable foreign exchange we are talking about.

The postings then paint a different picture of Soros, Narayana Murthy and Khosla. It appears pre-IPO PE investors wanted to exit at inflated prices and left this trio carrying the baby (dud share) meaning suckered them! Imagine the headlines of international media when they discover that old Soros had been suckered! Why the gang of 4 pre-IPO PE investors wanted to rapidly exit with inflated profits was because they wanted to beat the new MF regulations coming by December that would have capped their interest rates on one hand and deprived them of priority lending rates by public sector banks, the combined effect would virtually put them out of business.

15 comments:

  1. Does anyone feel its an extreme irony that the greatest end poverty innovation ever - developed in a neighbouring country Bangladesh microcredit - has been so mis-systemised in India whom many have believed to be best in the world at service plus knowledge franchises.

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  2. @ Chris

    I would say thank God for that. That's why Bangladesh remains where it was always and we have moved on. In fact, there is a serious challenge to Yunus bogus claim by BD's Finance Minister.

    I come from Bangalore and if this has turned out to be a global destination for jobs, then it is not because of micro loans. We followed the Far Eastern model to growth & prosperity - large scale economic activity which in this case is IT

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  3. Microfinance is a powerful tool if used well.. small scale traders, shopkeepers, farmers can save themselves from the 'leaches' that are moneylenders if they have a properly regulated microfinance system in place.
    the IPO indicates that there is huge profits to be made, but still the charge huge rates of interest. a tool which can be used for a lot of good is being nipped in the bud by selfish interests and perhaps by those who cannot stand the poor being empowered and rising out of their poverty. I call them anti-national.

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  4. SKS is one bad incident which should not discredit microfinance concept entirely. What it should teach us is that without proper regulation,accountability and implementation, this concept will die.

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  5. Thank you Anand.

    If SKS is the only bad example, I would tend to agree with you. The profit motive has attracted financial vultures - the hedge funds, venture capitalists etc - which have resulted in the social mission discarded and the focus solely on profits.

    I agree with you that as far as the concept goes we should not throw out the baby with the bathwater. If the crisis leads to MFIs to once again rediscover their soul, then it is worth it. On the other hand, if it is necessary to destroy to create again to stem the rot, then we must not shy away.

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  6. Rajan, I own shares in SKS and would never sell them, to all those who know anything about Microfinance, should be a buy if the share do fall. The shares of SKS would stay steady and would fall around march and would follow a steady growth path again. Vikram Akula is a very resiliant guy and I know him since the time he had 6000 clients :), you are making predictions based on low understanding of ground realities ... Microfinance would stay here as the profits are a game of scale of outreach and not interest rate. The interest rate were 40% and above in 2001 and no one made profits :). Keep watching this space and I can tell you, I have never lost in betting

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  7. I am no good in betting, so I stay away. But my consulting hunches has a good success rate as I honed it over the years. E.g the "hunch" you had a stake in SKS. While we sparred in your blog, I all along assumed that you had stakes of some significance in SKS. And you did.

    The concept of scale I understand too well - high volume-low margin. One of pg qualifications is in finance

    I also quite well versed with stock market, and reasonably proficient as a technical analyst. From this experience I understood one reality - stock valuations need not be related to earnings at all. You can have fabulous returns and still a low P/E and the other way round. The P/E is all about market sentiments. Once tainted, it is difficult to whip up sentiment.

    A strong share has high liquidity. A weak one has low one.

    Hard lessons in the stock market has taught me never be sentimental and never take things for granted. I am well aware that all it takes is one really good news for a share in the dumps like SKS to spurt. At the moment all SKS has a continuing string of bad news. It was an uphill task for SKS to keep a P/E above 50.Now it has dropped below 40 and still over-priced as there is a question cast over its future earnings, at least in the near term - from a wide variety of factors though an uncertainty exists, how it would play out.

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  8. In the recent microfinance crisis of SKS and AP , the two set of people who are happpy and enjoying to their maximum are
    1. Government District authority : now they have discretionary power and with power comes under table money :)
    2. Second set of people, who are slightly better are consultants. In the hope that MFIs are wiped out and the the poor again are thrown at the mercy of corrupt government and lethargic NGOs and consultants , so that they can again prosper on the grant based SHG model, do lot of impact study, write fancy reports and earn their livelihood.

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  9. Rajan

    I do not hold share in SKS :), i just wanted to give you a chance to feel good about your consulting hunch. But i would buy shares now just to show how much i trust the sector.

    vineet

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  10. So you are in Mumbai now. Must be with your broking agency now.

    Perhaps, it is more accurate if you said, do not hold shares NOW. Would be glad if my consulting "hunch" made you money.

    Yesterday was a failed bull charge - brought up the script to Rs 1200. Bears said thank you. I was relieved that it closed yesterday at 999.95 - my prediction of SKS not crossing 1,000 still holds.

    Rs 974 - still highly priced. You could sell at that price and cover at Rs 674. Make a cool Rs 300. Send me my commission anytime you feel like

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  11. When Murthy entered industry, i had realized this is a industry "to create value" (a place to make good money). The 1 rupee question is "do you want to be rich by robbing poor?"

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  12. Corporate governance is lacking, industry thought they can survive with out any support, be it the media, politics administrators or social charity....trust me the stock will trade in the range of 350-600 in the next 3 months, retail investors and banks will lose money...i am not an expert analyst, but imagine if your collections of 30-50 crore per week fails to reach for 3 months ( 15 weeks * 30-50 crore=???) what will be the impact, what kind of security you have to recover when politicians instigate the poor not to repay....this amount will raise with each week ...its a ripple effect...it is not just kolar or andra and not just sks or others aspiring to make a killing..banks will redifne microfinance, today they understand the amount of money to be made in this sector…happy trading …I don’t have any nor intend to buy any..i work of this industry, hence prefer to be annonymous

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  13. @Anonymous

    Thanx. But I do not trade. Gave it up a decade ago. Found that if I do not have positions, much more objective. Vikram Akula said there is big money to be made in the SKS IPO. Well bears are making big money now!

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