The micro-finance business makes no sense: Ramesh Damani
Ramesh Damani was the first to sternly warn us to stay away from micro-finance stocks and to not even touch them with a barge pole.
“… my problem with the microfinance area is that first you are borrowing money from the regular bankers and selling it at a higher rate which of course doesn’t make sense as a business model to me. If you see the peer-to-peer landing platforms in America they have all been now under pressure. Secondly, what microfinance assumes is that every person that you lent money to is an entrepreneur that he can go out and give you a return on capital so there will be a very low amount of non-performing debts. My personal sense and I could be completely wrong that this is better left in the NGO sector and the social sector rather than the stock market the idea that every entrepreneur take money and return it back at a higher rate of interest doesn’t make imminent sense to me,” Ramesh Damani said.
Since then, the entire MFI sector has become a no-fly zone for us.
Micro-finance business is “organized usury” with “no real future”: Shyam Sekhar
Shyam Sekhar is known to have a dislike for most NBFC stocks.
“I would not give a PE multiple to usury … that’s my simple view on microfinance” Shyam Sekhar snorted in disgust, leaving no room for doubt about his contempt for the MFI sector.
I would be happy to not ever have them. I have permanently shifted: Samir Arora
Samir Arora was initially a Bull of MFI stocks.
“… let’s be shameless about it from stock market point of view, till you continue to put more money, the old guy will never default …,” he said in his typical jocular style.
However, he soon realized that he was making a colossal mistake and staged a dramatic somersault.
“Microfinance, I used to own all the three of them till November. Now I would be happy to not ever have them. I have permanently shifted,” he said with a sheepish smile.
Even Basant threw in the towel
Basant Maheshwari was the last Bull standing on the MFI ship. Even during the dreaded demonetisation crises, Basant stayed defiant about his love for micro-finance stocks.
Retweeted ET NOW (@ETNOWlive):
— Basant Maheshwari (@BMTheEquityDesk) October 30, 2016
— CNBC-TV18 (@CNBCTV18Live) December 19, 2016
However, he also realized that he was fighting a lost cause. He threw in the towel and salvaged what he could from the stocks.
Micro-finance is now back from “Jaws Of Death”
Much water has flowed under the bridge since Ramesh Damani first issued his warning to us.
R Baskar Babu of Suryoday Small Finance Bank has explained that demonetisation had crippled the micro-finance sector.
The NPAs surged from a paltry 0.30% to a crippling 15%, based on an AUM of Rs. 1,09,000 crore as of September 2017.
Specifically, some states like Maharashtra with a gross AUM of Rs 9,396 crore has an NPA of 27.18 per cent, while Karnataka with a gross AUM of Rs 10,305 crore has an NPA of 16.70 per cent, he said.
However, the storm has now passed and the worst is over. The sector is back from the “Jaws of death,” he said in a dramatic fashion.
“The sector is slowly returning to near normalcy with near 100 per cent portfolio collections for the loans disbursed since January. The entire disbursement of loans which used to be in cash mode have been moving to digital channels as customers have started using the banking channel for transactions.”
He also pointed out that if the income streams of the underbanked segment are through digital, there is likely to be “unprecedented growth in retail credit”.
The government initiatives such as JAM, AEPS, BHIMUPI, India Stack and the like will propel the digital adoption and we are likely to see a large population getting dignified access to a suite of financial services which will lead to much better and sustainable financial stability and growth, he added.
Brahmal Vasudevan’s Creador/ Ardisia invests Rs. 215 crore in Ujjivan Financial Services
Brahmal appears to have taken the view that the worst is over for the micro-finance sector and that the time is ripe to place bets.
His Ardisia Limited, an affiliate of Creador, has invested Rs. 215 crore in buying a 5% stake in Ujjivan Financial Services.
Ujjivan is the holding company of Ujjivan Small Finance Bank, which is focused on providing loans and savings products to the unserved and underserved population.
Incorporated in 2004, Ujjivan today serves 3.7 million customers through its network of 445 branches across 24 states and Union Territories.
Ujjivan has demonstrated a strong financial track record, with its assets under management growing by nine times between 2012 and 2017 to Rs 6,400 crore, and with its return on assets and return on equity averaging at three per cent and 15 per cent, respectively.
In 2015, Ujjivan received an in-principle approval to convert into a small finance bank, which enables it to provide both credit and savings products to its clients.
After the launch of its banking operations in February 2017, it has completed its initial transformation of systems and processes and has already rolled out over 100 banking branches. Over the next 2 years, it is expected to convert its entire network of 445 branches into full-service banking branches.
Last Quarter of Pain for Ujjivan, Re-rating starts now
Edelweiss has come out with all guns blazing in favour of an investment in Ujjivan. It has claimed that Q2FY18 was the “last quarter of pain” and that the “re-rating starts now”.
It is also claimed that the “Asset quality problem firmly in the past. Collection Efficiency, PAR0 clearly indicate there is no fresh accretion of stress”.
“Collection Efficiency of the ‘new book’ created post December, for the 9-month period from Jan to Sep 2017, stands at a superlative 99.7%. Importantly, 9 months is reasonably long period from the perspective of Microfinance loan tenures. Even on the legacy book, there is no concern regarding fresh delinquent customers as such and provisions have been made largely on customers who were already overdue. In fact, PAR0 has fallen by as much 210 bps from 8.8% in Q1FY18 to 6.7% in Q2FY18, indicating that underlying asset quality has actually improved on the legacy book.”
Several other cogent and convincing reasons have been given in support of the buy recommendation.
A similar sentiment has been expressed by HDFC Securities and Nirmal Bang on why Ujjivan is a good investment now.
Microfinance stocks can give 100% return
Brahmal Vasudevan’s confidence with regard to the micro-finance sector is shared by other experts as well.
According to Saikat Das of ET, micro-finance stocks can be the “next big bet”.
He pointed out that the micro-finance stocks have not participated in the rally at all owing to the demonetisation blues. However, the Government’s drive for financial inclusion is likely to push these stocks to the forefront sooner or later.
Sanjiv Bhasin, the noted stock market expert, explained that the MFIs have “huge opportunities” and that they enjoy high margins.
The stocks are also available at cheap valuations, he emphasized.
Vishal Rampuria of HDFC Securities echoed these thoughts. He opined that some micro-finance companies are run by efficient managements and also have the advantage of a small banking licence. Their overall collection efficiency has also improved with de monetisation shock fading away.
Are micro-finance stocks better than HFC and private bank stocks?
This is where we have to put on our thinking hats.
HFC stocks are today smoking hot. Even DHFL, which is supposed to be the cheapest HFC stock on the planet, is demanding stiff valuations of 2.5x PBV.
The other high-quality HFC stocks like Gruh Finance, Can Fin Homes, etc are demanding PBV valuations of up to 16x, which is literally daylight robbery.
On the other hand, micro-finance stocks are still humble in their demands.
According to the ET report, the asking price for Ujjivan, Equitas, and Satin Credit ranges from 1.90x and 2.51x which is quite a steal given that some also have a private banking license to flaunt.
So, we have to take a cue from Brahmal Vasudevan and do serious research on whether we should shift all or some of our AUMs from HFC and NBFC stocks into MFI stocks!