Sunday, November 21, 2010

SKS Micro-finance has become a Proxy, Hammer it, Hammer the Whole Industry,

From a high of Rs 1,490 soon this is when the after listing, the SKS script closed last Friday at Rs 673, significantly below its listing price of Rs 985, after making a new all time low of Rs 601.

There was full drama too at the counter, the day after the share hit the 20% downward circuit breaker (see chart), reacting to SKS comments that its collections have come in lower than normal, post the Andhra Pradesh government ordinance. Presumably, to allay investor's fear after the crash, the CEO-Chairperson of SKS, Vikram Akula and his CFO, Dilli Raj, on opening bell gave an one-hour studio interview with CNBC-TV 18, the country's premier financial news channel. During the course of the interview, the SKS share soared to trigger the upper 10% circuit breaker, giving rise to speculation that this was a turnabout in the script's downturn momentum. 
Yet, this elation proved a momentary bubble. Despite mind boggling market breadth (7 million share turnover), SKS only managed to close 5% higher than its previous day's close, suggesting that the rebound was only in the nature of a relief rally. Technically, the script still remain very weak, having made new lows in each of the past eight consequent trading sessions. This week we can expect bear hammering to resume though the stock may open with some gains on Monday. Unlike the beginning of last week, where short positions significantly outnumbered longs, at close of the week, it was the exact opposite. Being a highly volatile script, SKS price movements are extremely vulnerable to news flows. There exists little possibility for sufficient flow of good news to sustainably power any strong upward movement of the script. On the contrary, there are increased possibility of bad news flows that could trigger sharp, speedy, downward movement of the script through panic selling especially when longs outnumber shorts in trading positions. 
Though Rs 601 is likely a good support level, it is unlikely to be firm enough to act as a bulwark against any gravitational pull down effects from really bad news flows like the possibility of a Regulatory Bill that strangulates micro-finance growth. Even the bulls understand this and accordingly it becomes very unlikely that there would be any frenzy bull charge to be seen during this week's trading. 

We suspect Rs 300 or near about, (the price Narayana Murthy of Infosys bought into the script), as its  true intrinsic price  level. But with the dark underbelly of micro-finance daily being constantly exposed, the bottom of the share could even plunge below Rs 300 levels. Vikram Akula on the run up to the IPO said investing in SKS will give alot of money for its investors. It is ironic that it is the bears who are now making all the money out of SKS script these days and the investors ended being burnt by it!

Last week, many equity analyst and brokerage firms have downgraded SKS profitability, most of them advising investors to dump SKS. These include  Rajesh Jain; Deepak Mohoni; Jitendra Sriram; Sharyans Resources; Karvy; Infina Finance and several others. Mutual funds have already dumped SKS (Read here). 

JP Morgan and Kotak Mahendra though drastically cutting down the profit outlook by 30% for SKS in the next three years, however upgraded the share to a buy at Rs 700 levels. The irony was just as JP Morgan's and Kotak Mahendra's advisories were flashed, the SKS script breached Rs 700 and went straight to Rs 601, in a matter of minutes and then rebounded sharply to suggest Rs 601 as a fairly strong support level for the script instead of Rs 700 as they suggested. Both JP Morgan and Kotak Mahendra provided a whole series of risk caveats accompanying their buy advisories while capping the stock's upside from buy levels to 25-30%. In simple words, both advise buys while cautioning the script falls within the highly risky category viz. advise buy only for those with very high risk appetite!

Our blog was in fact the first to categorically give advance warning, as early as two weeks ago, that SKS script was entering a free fall  (Read here) and many of these equity analyst and brokerage firms including JP Morgan had been repeat visitors to our site.

Being highly volatile as demonstrated by Friday's wild swing of Rs 102 together with as much as 70 million in market depth that is rapidly growing, makes the SKS counter a trader's delight. It is probably on its way to be the number one counter for equity traders in the country. This can't be good news for the micro-finance industry, as this puts both SKS and Vikram Akula under constant media glare, becoming the proxy for continued debate on the social relevance of the industry. We understand many in the  micro-finance industry are actually appalled and squirming at this turn of events.


It was however interesting to note that Vikram Akula repeatedly chose to describe SKS as a business. Though he wore his trademark designer Khadi kurta, all pretense was off to live up to his Messiah of the Poor image carefully crafted by his PR Department. This image fell apart quickly as the world realized that this sleazy operator only used images of helping the poor to catapult himself as one of the wealthiest in the world. Maybe in the course of time, who knows he would discard his ethnic wear too to exchange for a Pierre Cardin suit and tie too? These days Vikram Akula walks, surrounded by a protective cordon of security men armed with AK47s, being afraid of a violent backlash from the public, especially Naxalites. That a person once touted as the Messiah of the Poor now needs protection from the poor is an image the industry would like to wish away in their present  battle to win public support. But there he is as mascot for all those who want to ban MFIs or rein them in by strangulating regulation. Vikram Akula embodies everything we find repulsive of MFIs and we cannot ask for more as our mascot!

Back to the exclusive interview with CNBC-TV18, Chairman Vikram Akula and his CFO Dilli Raj tried to allay investor fears of  prospective insolvency of the company by arguing SKS was well capitalized. Akula said that though the Andhra Pradesh ordinance has some impact on the MFIs, SKS could easily weather the storm on the back of a strong balance sheet, capital adequacy ratio (CAR) and besides its non-AP portfolio has 99% repayment rates. 

Dilli Raj intervened to reiterate that "There are absolutely no issues in 18 states where we work." Akula further informed that SKS exposure to AP stands at Rs 1400 crore which is 26% of the total loans."  "ICICI Bank, Axis, SBI, PNB have supported us. We do not need any liquidity support from anyone and our loan book is expected to grow to Rs 7500 crore while RoA maintained at 5%", Akula boasted.

Dilli Raj added "To start with our exposure to Andhra Pradesh it is a mere 20% of total portfolio mix. In hard number that is Rs 1,400 crore compared to an assets under management (AUM) of more than Rs 5,600 crore. In terms of your question on what is overdue, the ordinance came into effect from October 15, with a monthly periodicity so collection it started November 15 onwards. It is just three days, which is too early to talk about what is overdue.

Going back to one point on the capital adequacy, the way to look at it is our exposure to Andhra Pradesh is a fraction of our net-worth of Rs 1,800 crore are not a multiple. There has been liquidity in the price for some time now. We manage our liquidity through well defined liquidity metrics, which calls for holding sufficient cash and cash equivalent to meet all corporate obligations including bank repayment, OPEX and most importantly disbursement to existing customers for the next six months."

The duo said that though SKS is hardly affected by their recent backlash against MFIs, the smaller players may not be that lucky and this may bring about industry "consolidation", a euphemism for mergers, acquisitions and bankruptcies.

Vikram Akula continues "Given our scale and our efficiencies in terms of economies of scale, even at 24% there is a margin one continues to have that will allow for continued profitability. Maybe not the same profitability we once had but certainly a healthy profitability going forward. The specific numbers we are not in a position to comment on as of yet because we need to wait and see how monthly versus weekly evolves." 

While the immediate impact of the interview led to increased market confidence as reflected in the SKS share rebounding to trigger the 10% upward circuit breaker, as the market slowly started to digest the import of SKS statements, more and more it looks as a total public relations disaster exercise:

1. The share price of SKS tanked when the company issued a statement that the Andhra developments will have material impact on their bottom-line. (Read here). In less than 24 hours, Chairman Vikram Akula and his CFO Dilli Raj went on air to virtually retract this statement. Firstly, this detraction came at the cost of SKS credibility, already severely battered. Secondly, it signals a blow to the Narayana Murthy policy line of maintaining complete transparency. This act signals the return of spin as SKS policy. The board room battles with SKS could now turn more interesting. Watch this space. 

2. The claim that SKS is a business and well capitalized opened a can of worms. Firstly, it fanned the fires of the on-going debate, even within the government, whether such firms  deserve priority lending subsidies. The chorus against the government to end such policies is now expected to grow even louder and shriller. In this sense Akula-Raj put their foot into their mouth. 

Secondly, it may accentuate the split within MFIs even deeper. Vijay Mahajan, the visible face of MFIN, a micro-finance association, earlier told the media that the micro-finance sector is collapsing from cash flow problems.So real was this prospect that the industry fanned the rumour  of the banking industry collapse due to their exposure to the micro-finance industry, even when it wasn't a fact. SKS on the other hand, broke ranks with the industry to claim that bank lending to them remain unaffected and that they are in the pink of financial health. This has not gone down well within the industry, creating much  disaffection among MFI community, particularly smaller ones who are suffering from severe cash flow problems on account of banks going slow on releasing even committed credit pipelines. This  gaffe by Akula-Raj duo is bound to raise the question whether SKS is the sole beneficiary of government partiality. The government, already pushed to the backfoot with allegations of Rahul Gandhi's links to SKS on the basis of one innocent visit to SKS a few years ago, are now expected to take a harder line. 
3. Notice the differing estimates of SKS AP exposure at differing points of time by the company's official spokesmen. When the crisis first broke out  this figure was put as 38%, then it dropped to 28% and now Vikram Akula  says it is only 26% while his CFO puts it at a mere 20% in the very same interview, where the duo appears together. Perhaps, based on the Andhra developments, the SKS long term strategy is to drastically reduce their AP exposure. But the fact is, as of today it is fairly high. SKS is the leading MF lender in the state with some within the industry even saying that the state accounts over 50% of their lending. 

Andhra being the MFIs largest market in the country is not an accident as their growth was fueled by piggy backing on NGOs and SHGs  who have a very strong presence in the state. Outside its major markets -  South India, Orissa and West Bengal - it is not easy for MFIs, including SKS, to compensate losses from Andhra from increased profits  from rest of the country  for the simple reason that neither NGOs and SHGs have much of a presence nor SKS have the infra-structure  to scale-up overnight.  

This perhaps explains why the Akula-Raj duo chose to be evasive on repeated questions on how hard their earnings will be hit due to the Andhra developments. It must be noted that SKS attracted a high PE (Price/Earning)s because there was lot of expectations built in probably  based on their 2009-2010 numbers,  that their 20010-2011 performance would be even a lot better. The probability of these expectations materialising remain extremely low, though the SKS third quarter results would be a clearer indicator.

 4. The claim of outside AP, SKS repayment is around 99% should also be taken with a pinch of salt. Sources within MFIs suggest that in West Bengal and Orissa, the other two major markets for micro-finance, repayment rates are down to 80-95%. The morale of micro-finance have taken a huge beating all over the country and this is bound to reflect itself in repayment payments in the weeks and months again, that in turn reflect itself on both the top-line and bottom-line of the company.

5. Smaller MFI players should take huge offense about Akula's comments that they may not be that lucky and this may bring about industry "consolidation", an euphemism for mergers, acquisitions and bankruptcies. One small MFI promoter rang me up yesterday to say "SKS is the government's blue-eyed boy. After the IPO, SKS is cash rich, and now out to either bankrupt us or swallow us in his own terms."  Surely the split within the MF industry will increasingly become visible and pronounced. It will the small MFs vs the big guns. Who would the public support then? The odds are with the smaller MFs. 


1. MFIs responsible for 16 suicides, SKS among them, final number to increased as investigations get complete: AP govt: Read more

2. MFIs no better than Moneylenders, need tight regulation: Reserve Bank Governor: Read more

3. Contrary to Akula's claim, rating agency CRISIL  said that Bank funding to entire India MFI sector diminished: Read more

4. Udaia Kumar, managing director of rival Share Microfin says: Even if a single MFI defaults, it might have a trickle-down effect on the entire sector Read more
 6. Crisil claims collections have dropped by below 20% as against almost 99% prior to the government ordinance. The report said that the creditworthiness of the MFIs also depended on their exposure to Andhra Pradesh. Read more.


1 comment:

  1. Just too many things cropped up inside my head.
    Thanks for the link.