The country’s largest microfinance lender SKS Microfinance Ltd has received interest from a few of its existing investors to buy shares in the proposed qualified institutional placement (QIP), according to a company executive. However, this was not enough to assuage investors who drummed down the shares to an all-time low of Rs 122.4, declining around 5 per cent to hit the lower price circuit for the day on the BSE in a weak Mumbai market on Friday.
The firm, which is now loaded with losses after a blockbuster debut last year and at one point, had a market value of around $2 billion, is aiming to raise up to Rs 900 crore through the QIP. At present, the company is valued at just Rs 885 crore and will find it difficult to raise the money at one go without leading to significant equity dilution.
S Dilli Raj, CFO of SKS Microfinance said, “The QIP is basically a growth capital raise to help us cash in on the demand-supply gap in the non-Andhra Pradesh markets.”
“The non-Andhra Pradesh outstanding has reduced by $2 billion for the sector and the regulatory clarity is driving buoyancy in the long term,” he added.
According to Raj, all pre-IPO investors continue to stay invested in the company including Catamaran Management Services, WestBridge, Sequoia Capital India, Sandstone Investment Partners, Kismet Microfinance and veteran venture capitalist Vinod Khosla.
Raj said the potential investors fall into five different buckets – existing investors, socially relevant investors, microfinance investment vehicles in the developed world, private equity players and public market participants.
“The investors have shown interest on account of the fact that the company’s bullet-proof balance sheet has weathered the external event well in the past one year and that the company is ready to look beyond the Andhra Pradesh situation. The company has met all its financial commitments including repayment to banks. The company’s balance sheet is strong because of high liquidity and adequate capitalisation with a bank balance of Rs 236 crore and net worth of Rs 1,181 crore as of September 30, 2011,” he said.
Losses Due To Conservative Provisioning
The company also defended its huge loss of Rs 384.5 crore for the quarter ended September 30, 2011.
“The decision to provide for Rs 350 crore in this quarter itself has been voluntary, although we could have easily spread the same over the next six quarters as per the Reserve Bank of India norms,” said Raj.
“We have written off the outstanding loans in AP and brought them down from Rs 1,500 crore to Rs 822 crore. In addition, there is a cushioning of deferred tax of Rs 220 crore and if that is factored in the total, outstanding comes down further. If we write off the total loan outstanding in AP, we get a tax benefit on write-off of Rs 270 crore and, in the unlikely worst case scenario of zero recovery of loans in AP, we would only be left with a net residual risk of Rs 337 crore,” he said.
Capital Adequacy Ratio & Diminishing Risk Of Contagion
The company said its average capital adequacy over the last five years was at least 2.5 times of the RBI norms and at present, it is 47 per cent and its net worth is Rs 1,181 crore as of September 30, 2011. It added that in a worst case scenario where the firm’s collections would be zero in the state of Andhra Pradesh, the restructured capital adequacy ratio would still be 35 per cent.
“We can safely put the fear of spread of the AP contagion behind us,” said Raj. “Our confidence is on account of three reasons – collection efficiency in non-AP states is 96-97 per cent; seven states with strong MFI operations are part of the panel that drafted the Central MFI Bill which is likely to be tabled in the Parliament in the Winter Session and no other state has enacted a law similar to Andhra Pradesh.”