Upgrade SKS Microfinance to overweight on strong medium-term earnings visibility amid a tough environment; long-term uncertainty due to SFB license miss remains.
RBI recently doubled loan limits for shorter-tenor loans; this should drive higher loan growth and operating efficiency at SKS. Hence, while long-term uncertainty remains, due to it not receiving a small finance bank (SFB) license, we see very strong earnings growth in the near to medium term (MSe ~55% EPS CAGR F16e-18e). This, in the context of weak earnings growth in the rest of the group, should drive stock performance.
This should also help customer acquisition as SKS would be able to offer a higher amount. As a risk management policy, however, SKS’ maximum loan size is Rs 20,010 in the first cycle to a new borrower vs. its cap of Rs 29,565 on shorter-tenor (50 week) loans (per product profile on website). This should also help improve operating efficiency at SKS.
Further, SKS has seen a significant reduction in its cost of funds, owing to falling risk premia driven by improving credit rating and performance track record, as well as access to more and cheaper sources of funding such as refinancing from Mudra Bank and commercial paper. As a result, SKS has been able to lower its cost of borrowing and, hence, lending rates (a pass-through given the spread cap of 10%).
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