Express Idea: SKS Microfinance Ltd – BUY

As we expect existing operating assets to drive bulk of the incremental asset growth in coming years, operating cost/AUM ratio should fall quite significantly. Asset quality within the industry and particularly for SKS has stabilized over the past couple of years and repayment rates have been above 99%. So going forward, under normal circumstances, credit cost should remain stable at near 1% of AUM. We estimate SKS to deliver average RoA (on managed assets) of 3.9% over FY14‐17. Even with comfortable leverage of 5x, long term sustainable RoEs will be at 20‐23%. Considering such high profitability, company’s valuation at 2.4x FY17 P/ABV is reasonably attractive.

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