Retain ‘equal-weight’ on SKS Microfinance with target price of R480 per share. SKS’ Q2FY16 profit after tax (PAT) of Rs 779 million (up 37% y-o-y) was 18% ahead of our estimate and Bloomberg consensus. PBT growth was 78% y-o-y. The effective tax rate was 23% (minimum alternate tax) from near zero levels last year – SKS did not account for MAT credit benefit in the P&L. Higher revenues, reflecting higher than expected AUM growth, drove the beat. Operating efficiency improved. SKS raised its FY16 PAT guidance ~23%, from Rs 2.35 billion (provided with FY15 results) to R2.9 billion (up 55% y-o-y). Asset quality was stable.
Funding costs for SKS have been falling. With spreads being capped at 10% for MFIs, lending rates have been declining. In late September, SKS cut interest rates 125 bps to 20.75%, effective October 1 (cumulative cut of 380 bps since October 2014). According to the results press release, its marginal cost of funds is 11.2%.
The cost-to-AUM ratio improved q-o-q to 7.6% from 8.5% (10.0% in Q2FY15). The cost-to-income ratio improved to 47% from 52% (58% in Q1FY15). SKS has completed its Smart TAB project, enabling its loan officers to carry out all their activities on tablets. This compares to our estimate and Bloomberg consensus for FY16 of Rs 2.5 billion. We will revisit our estimates after further discussions with management.
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