Disbursements Power Earnings, Asset Quality Remains Intact
SKS Microfinance's stock fell reaching its new low of Rs 639. Investors rushed to dump the stock after the company faced turbulence in loan recovery in one of its key markets.
A month ago, Andhra Pradesh government had passed an ordinance stopping SKS from the recovery of loans in the state, which contributes nearly one-third to its loan portfolio. The company has announced that its collections were lower on account of the shift from weekly to monthly collections in Andhra Pradesh. The company has also reiterated that if not redressed, this shift would have a significant impact on the company's profitability as well as asset quality.
Barring this critical situation, the company has otherwise reported strong performance for the September 2010 quarter. Net profit of the company almost doubled during the quarter compared to the year-ago period. This was on the back of 61% year-on-year growth in its disbursements. For the first half of FY2011, the company has already disbursed 70% of its total loans disbursed in FY2010.
The company's asset quality remained intact despite the robust growth in assets. Its net non-performing assets formed only 0.1% of net advances as of September end. The company has a positive asset-liability structure. The average maturity of its assets at 4.7 months is almost half of the maturity of its average liabilities. This shows that its assets get re-priced faster than its liabilities, which works favourably for a company in a rising interest rate scenario.
While the company looks quite strong on the basis of its financial performance, both regulatory factors and corporate governance issues have added to the fall of the stock in the past one month. The stock has largely under-performed the benchmark Sensex in the past one month. The company's stock price has almost halved as against a 3% drop in the Sensex during the period.
As Andhra Pradesh forms almost 27% of its gross loan portfolio as of September-end, the regulatory issues in the state might hit the company's revenues in coming quarters. Furthermore, the company recently reduced the interest rate it would charge its borrowers in the state by 2.1%, which would affect its margins.
For investors, the main concern lies in the corporate governance and regulatory factors. A recovery in its stock price looks difficult until these issues are resolved.
