Analysis of business viability of SKS Microfinance

Group 10

Analysis of business viability of SKS Microfinance

Financial Management

Group 10 Analysis of business viability of SKS Microfinance Financial Management

Submitted by:Himanshu Agarwal (P35036)Edwick Bilung (P35027)Minakshi Chhikara (P35051)Pawan Bhatt (P35064)Saborni Poddar (P35084)

Acknowledgement

We have received earnest cooperation and assistance from number of persons towards completion of the project. Throughout the writing of the project, the influence of Prof. Rakesh Arrawatia has been guiding light. We have been greatly benefited by his guidance, profound knowledge on the subject and his continued interest in the work. There is special pleasure in acknowledging the help of Garima Vijay, Product Manager, Ujjivan Microfinance. Her intense accuracy in respect of the subject had provided the impetus for the commencement on study.We are highly obliged to acknowledge Prof. Rakesh Arrawatia for giving us an opportunity to contain a detailed study and analysis of desirable topic relevant to full of our interest.

TABLE OF CONTENTS

1. Project Outline04

2. Objective04

3. Introduction04

4. Operation Methodology05

5. Performance of SKS till 2010-1106

6. IPO and Andhra Pradesh crisis: Andhra Pradesh MFI - Regulation of moneylending ordinance, 201007

7. Turnaround: Study of financial statement of FY 11-12, 12-13, 13-1410

8. Analysis11

9. Comparative study of financial ratios (FY13-14) of SKS Microfinance withother MFIs of India 13

PROJECT OUTLINE1. Objective:2. Introduction:3. Operation methodology4. Performance of SKS till 2010-11 (before IPO)5. IPO and Andhra Pradesh crisis: Andhra Pradesh MFI - Regulation of money lending ordinance, 20106. Turnaround: Study of financial statement of FY12.7. Comparative study of financial statements of SKS MF and other major players.Objective: The basis of the study will be detailed analysis of past performance of the company, business complications it had faced and present situation of SKS MF in market.Introduction: SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC), regulated by the Reserve Bank of India. SKS' mission is to eradicate poverty by providing financial services to the poor. The company operates across 20 of 29 Indian states.According to a CRISIL Report on Top 50 Indian Microfinance Institutions (MFIs), SKS Microfinance is the largest MFI in India with more borrowers, more branches and more loans as of 30 September 2008. SKS was founded in 1997 by Vikram Akula.SKS charges an annual effective interest rate between 26.7% and 31.4% for core loan products. At the end of financial year 2010 on 31 March 2011, the company listed a gross loan portfolio of US$925,844,433 with 6,242,266 female active borrowers.SKS Microfinance offers 8 financial products and services to its clients - Income Generation Loans, Mid-Term Loans, Mobile Loans, Sangam Store Loans, Housing Loans, Funeral Assistance, Gold Loan, and Life Insurance.As Indias only listed micro lender in October 2014 the company posted a net profit of Rs. 56.75 crores due to high demand for loans outside its home base of Andhra Pradesh. The company walked towards a profit in the fiscal third quarter of 2012-13 after reporting losses for seven consecutive quarters. Excluding the states of Telengana and AP its loan portfolio expanded by 50% and reached Rs. 3043 crore as compared to Rs. 2029 crore in the same period the previous year.The average cost of borrowing has been reduced to 12.2% from the previous rate of 12.7% after it raised 400 crore in May and improved credit ratings. The current collection efficiency has risen to 99.8% and the company is planning to increase its earnings from gold loans and loans to buy mobile phones. The future plans for this company also includes home loans, which will be raised with the help of Housing Development Finance Corp. Ltd, financing for water purifiers, solar lamps.Started as an NGO in 1998, SKS is today a for-profit NBFC regulated by the Reserve Bank of India. As of December 31, 2014 it has 62 lakh members associated with 1268 branches. It has disbursed Rs 37458 crore as of December 31, 2014. It has a vision to serve 50 million households across India and other parts of the world and also to create a commercial microfinance model that delivers high value to its customers. Operation methodology:SKS MF operates across 17 states in India and give poor people access to financial services like credits and insurance services. Loan amount usually ranges to Rs 2000- Rs 12000 to poor woman so that they can start their own small business or increase their income by increasing the size of herd. SKS uses the group lending model where poor women guarantee each others loans. Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans. Repayment rates on non collateral loans are nearly 99%.

Performance of SKS till 2010-11:History: The company was incorporated as SKS Microfinance Private Limited on 22 September, 2003 under the Companies Act, 1956. On January 20, 2005 it registered with the RBI to carry on business as an NBFC without accepting deposits. On September 1, 2005 all the assets and properties including existing loans and receivables pertaining to microfinance activities were transferred from the SKS society to the company as per a MoU. On January 31, 2006 it entered into a Subscription cum Shareholders Agreement with SIDBI for allotment of 1,000,000 Equity Shares. Investments: Throughout the period between 2006 and 2010 it raised capital by issue of equity shares, NDCs and commercial papers. In July 2009, Bajaj Allianz made an investment of $10 million (INR 50 crore), the first-ever investment by an insurance company in an Indian microfinance institution. In March 2006, SKS closed its first round of equity investment; the largest microfinance investment in India to date - $3.2 million from some of the worlds leading microfinance investors, and then eclipsed this accomplishment with a second round equity investment of $11.5 million in March 2007. In November 2008 SKS raised equity worth $75 million (Rs 366 crore), the largest equity raised by an MFI to that date. The third round of equity worth Rs 147 crore was raised in January 2008. SKS leverages its equity with public sector, private sector and multinational bank debt.Loans: On January 10, 2010 SBI sanctioned Rs. 350 million towards term loans and Rs. 650 million towards cash credit for on lending purpose. On January 12, 2010 availing of microfinance corporate loan facility from HDFC for Rs. 100 million to provide financial assistance for undertaking housing finance activities. On March 8, 2010 Tier-II unsecured subordinated debt of Rs. 1,000 million by SIDBI was sanctioned for tenure of eight years.Performance: During the three year period from fiscal 2006 to fiscal 2009, SKS expanded the membership from 201,943 in five states to 3,953,324 in 18 states, and their branches expanded from 80 to 1,353. Their total loans outstanding increased at a CAGR of 162.9% from Rs. 780.50 million as of March 31, 2006 to Rs. 14,175.23 million as of March 31, 2009, and further increased to Rs. 28,011.08 million as of September 30, 2009. Over the three year period from fiscal 2006 to fiscal 2009, profit after tax increased at a CAGR of 265.2%, from Rs. 16.47 million to Rs. 801.96 million. For the six month period ended September 30, 2009, the total income was Rs. 3,846.88 million and profit after tax was Rs.559.01 million. IPO and Andhra Pradesh crisis: Andhra Pradesh MFI - Regulation of money lending ordinance, 2010In August 2010, SKS completed an IPO that from the global financial perspective was a great success: it was 13 times oversubscribed, and the company's valuation reached the top of the offer band price (which initially listed the value of the company at $1.5 billion), and the share price rose 13% on its first day of trading and rose 29% within four weeks of the IPO.Offer details

Issue Open Date28/7/2010

Issue Close Date2/8/2010

Listing Date16/8/2010

Face Value (Rs).10

Offer Price/Range (Rs)850.00-985.00

Issued at (Value)Premium (Rs 975.00)

Issue Size(Retail)5037474.00 Shares@Rs 985.00/share

Issue TypePublic Cum Offer for Sale (Book Building)

Return OnOffer PriceListing Price

Holding Period Return57.74%59.81%

Holding Period (Days)16531639

Annual Returns12.75%13.32%

The objectives of the issue were:1. To meet future capital requirements arising out of growth in business2. To achieve the benefits of listing on the Stock Exchanges.In the process, SKS raised $348 million in fresh capital that, in theory, was supposed to help further grow the business and allow SKS to serve more people with financial services and microcredit. Andhra Pradesh Microfinance crisis: Andhra Pradesh had the highest concentration of microfinance operations with 17.31 million SHG members and 6.24 million MFI clients in the year 2011. The total microfinance loans in Andhra Pradesh including both SHGs and MFIs stood at Rs.157,692 million with average loan outstanding per poor household at Rs. 62,527 which is the higher than the national average of Rs. 7,700 and highest among all the states in India. High penetration of both SHGs and MFIs also led to stiff competition for client outreach between the state and private financial providers resulting in wide conflict of interest.The Andhra Pradesh government on 15th October, 2010 came out with an ordinance to clamp down on Microfinance Institutions (MFIs), whose strong arm tactics had led to the death of a number of people in the state. The ordinance called the'Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance, 2010', went into effect immediately on 15th October, 2010. The law, aimed at reining in the alleged harassment of borrowers, banned MFIs from approaching the doorsteps of their customers, lengthened the loan recollection cycle from one week to one month, and made it mandatory for the lenders to get government approval to give a second loan to the same borrower.According to two unpublished reports one of which was commissioned by the company itself, SKS employees were responsible for at least 9 suicides in AP.As of January, 2011, the MFI repayment rates fell from 99% right before the issuance of the ordinance to less than 20%. The stringent regulations set by the state government (such as monthly repayments, all MFI branches to be registered with the government, no door to door collection of repayments etc) coupled with active encouragement by the local politicians led to the fall in repayment levels. Banks were also hit by crisis as 80% of loans MFIs borrowed were from the banks. Of the Rs. 21,000 crores that banks had outstanding to MFIs, roughly a third was borrowed from private banks. Banks and financial institutions lost their trust on MFIs credibility to repay the loans. Fresh lending by banks to MFIs in the year 2011-12 declined by over 38%.Loan outstanding against MFIs came down by almost 17% during the year 2011-12. Client outreach registered negative growth for the financial year FY 2011-12. In comparison to the previous year, Gross Loan Portfolio also shrunk by 14 per cent in FY 2011-12. Job cuts were enforced by Indias lone listed micro lender, SKS Microfinance Ltd, which slashed its headcount by more than 15,000 in two-and-a-half yearsfrom 25,735 in end-December 2010 to 9,959 in June 2013. The loan book for SKS declined to Rs. 1,283 crore in March 2013 from Rs. 3,037 crore in March 2010.It was due to the Microfinance crisis in Andhra Pradesh in the year 2010 that a bill was tabled in the parliament THE MICRO FINANCE INSTITUTIONS (DEVELOPMENT AND REGULATION) BILL, 2012 which aimed to regulate MFIs in India.

Turnaround: Study of financial statement of FY 11-12, 12-13, 13-14 (Rs in crore)Year ended march 31201120122013

Total revenue1269.5472.3352.6

Less expenditure 1098.61796.1649.7

Profit (loss) before tax170.9(1323.7)(297.1)

Profit (loss) after tax111.6(1360.6)(297.1)

Surplus brought forward 220309.3(1,051.3)

Amount available for appropriation331.6

Appropriation has been made as under

Transfer to statuary reserve22.3

Surplus carried to balance sheet309.3(1,051.3)(1,348.4)

Earning per share16.1(188.06)(30.55)

Observation 1. Companys total revenue for the year ended March 31, 2012 has recorded a reduction of 62.8 percent from Rs. 1,269.5 crore to Rs. 472.3 crore. And in 2013 Companys total revenue was further reduced to 25.4% from Rs. 472.3 crore in FY12 to Rs. 352.6 crore in FY13 -2. Net Profit After Tax for the year 2012 declined from Rs. 111.6 crore to a loss of Rs. 1,360.6 crore in FY12. But in the year 2013 net loss declined from Rs. 1,360.6 crore in the previous year to Rs. 297.1 crore

During the year FY2012, Companys member base has decreased by 26.8 percent to 53.5 lakh (5.35 million) as compared to 73.1 lakh (7.31 million) for the previous year, which is primarily due to Andhra Pradesh Micro Finance Institutions (Regulation of Money-Lending) Act, 2010 (AP MFI Act). Consequently, loan disbursement decreased by 65.1 percent from Rs. 7,831 crore to Rs. 2,737 crore. As a result in that year, Company has closed or merged 918 branches as part of its business rationalization policy.

In the year FY2013 due to the increasing growth momentum in non-Andhra Pradesh states has helped the Company in reporting a lower operating loss (excluding Andhra Pradesh provisioning) of Rs. 297 crore in FY13 as compared to a loss of Rs. 1,360.6 crore in FY12. In FY13, Companys Andhra Pradesh portfolio reduced to a nil from a high of Rs. 1,491 crore at the start of the Andhra Pradesh micro finance situation in October 2010. With this last and final provisioning towards the Andhra Pradesh exposure, Company looks beyond the Andhra Pradesh micro finance situation.

ANALYSIS Verge to exit in FY2011Andhra Pradesh microfinance situation The achievements in FY2011should be viewed in the backdrop of the sensitive Andhra Pradesh situation post the promulgation of the Andhra Pradesh Micro Finance Institutions (Regulation of Money-Lending) Ordinance, 2010. Subsequently, on January 1, 2011, the Government of Andhra Pradesh introduced the AP MFI Act to replace the AP MFI Ordinance. Prior to the promulgation of the new law, Andhra Pradesh was Indias largest micro finance market accounting 30 percent of borrower accounts and loan outstanding of micro finance institutions. The impact of the new law on the company -a. In the first half of FY11, prior to the promulgation of the new law, MFIs in Andhra Pradesh disbursed Rs. 5,000 crore to borrowers. This dropped to Rs. 8.5 crore in the second half of FY11.

b. The exit of microfinance companies had created a credit gap of Rs. 4,000 crore in Andhra Pradesh, The Hindu newspaper quoted a senior official of National Bank for Agriculture and Rural Development as saying.

c. Close to 9.2 million customers or almost one in three microfinance borrowers (almost equal to Mumbais suburban population) have defaulted on loan repayment, according to Business Standard and The Economic Times. These members would appear as defaulters in Credit Bureau lists.

d. Micro finance recovery rates in Andhra Pradesh had fallen to 10 percent from 95 percent.

e. The Company has also brought down the residual Andhra Pradesh exposure (Net) to Rs. 236 crore from a high of Rs. 1,491 crore in October 2010 by writing off/ provisioning Rs. 1,129 crore.

Rebirth of S.K. Micro Finance Companya. In the FY2013Company sustained its turnaround with a higher profit of Rs. 2.7 crore in Q4-FY13 as compared to a profit of Rs. 1.2 crore in Q3-FY13, when it turned around after seven consecutive quarters of losses caused by the external event, namely the Andhra Pradesh microfinance situation.

b. The Companys loan disbursements rose by 65% to Rs. 1,295 crore in Q4-FY13 from Rs. 784 crore in Q3-FY13 while incremental drawdowns registered a 201% jump to Rs. 1,704 crore in Q4-FY13 from Rs. 566 crore in Q3-FY13 (year-on-year increase of 94% to Rs. 2,875 crore in FY13 from Rs. 1,484 crore in FY12). The non-Andhra Pradesh loan portfolio outstanding increased by 35% to Rs. 2,016 crore in Q4-FY13 from Rs. 1,496 crore in Q3-FY13.

c. The Companys cost of interest-bearing liabilities has come down significantly to 12.5% in FY13 from 13.4% in FY12 while collection efficiency in non-AP states has further improved to 99.1% in FY13 as compared to 95.4% in FY12. .

d. With this, Companys financial turnaround has been completed and sustained. Strong capital base, robust liquidity, improved productivity and cost efficiencies should further accelerate these gains. The debt-equity leveraging improved to 4.1 times in Q4-FY13 from 2.7 times in Q3-FY13 (2.3 in FY12).

Comparative study of financial ratios (FY13-14) of SKS Microfinance with other MFIs of IndiaEPS:Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company.

From the above graphical presentation we observe that Ujjaivan Financial Serviceshas more EPS as compared to other other companies which is a good sign as the companies with a high earnings per share ratio is capable of generating a significant dividend for investors, or it may plow the funds back into its business for more growth; in other words a high ratio indicates a potentially worthwhile investment, depending on the market price of the stock. On the other hand Swadhar Finserve has a negative EPS which shows that company is losing money. A negative EPS tells you exactly how much money the company lost per share of outstanding stock, which is why you'll also see it called "net loss per share. Diluted EPS = net profit number of shares adjusted for future dilutions

Debt Equity ratio:Debt to equity ratio is a long term solvency ratio that indicates the soundness of long-term financial policies of the company. It shows the relation between the portion of assets provided by the the stockholders and the portion of assets provided by creditors. It is calculated by dividing total liabilities by stockholders equity.A ratio of 1 or 1:1 means that creditors and stockholders equally contribute to the assets of the business.A less than 1 ratio indicates that the portion of assets provided by stockholders is greater than the portion of assets provided by creditors and a greater than 1 ratio indicates that the portion of assets provided by creditors is greater than the portion of assets provided by stockholders.Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of greater protection to their money. But stockholders like to get benefit from the funds provided by the creditors therefore they would like a high debt to equity ratio

From higher Debt equity ratio, we can infer that company is trying to come out of stable state and has a positive outlook towards the growth in future.From the above data we observe that Equitas Microfinance has a high D/E ratio that is 4.63 hence we can say that this company has the potential to generate more earnings than it would have without this outside financing but it is also sharing higher risk as it has the burden to repay the debt which can lead to bankruptcy, which would leave shareholders with nothing. Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash

From the above graph we observe that Swadhar Finserve has high current ratio which is 2.11. It states that it has the high solvency as compared to other organizations as this firms current ratio is bit higher to the ideal ratio (2:1)which can be analyzed as it is in a good situation to meet the current liabilities but it can also be observed that the company may not be efficientlyusing its current assets or its short-term financingfacilities.The SKS Microfinance and Equitas Microfinance firm has 1.4 as their current ratio which is comparatively lower to the ideal ratio (2:1) this shows that the firm can have troublegetting paid on their receivables or have long inventory turnover can run intoliquidity problems because they are unable to alleviate their obligations.Current ratio must be analyzed in the context of the norms of a particular industry. What may be considered normal in one industry may not be considered likewise in another sector.

References:1. http://www.chittorgarh.com/ipo/sks_microfinance_ipo/253/2. http://www.ndtv.com/india-news/micro-finance-bill-is-anti-poor-says-andhra-pradesh-government-official-482323

3. http://www.dnaindia.com/money/report-andhra-pradesh-passes-microfinance-act-a-replica-of-ordinance-1481414

4. http://www.sksindia.com/investor_relations.php

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