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Indian Investors Buy SKS Story; Scrip Lists At A Premium

16 August, 2010

History repeats itself as India’s largest microfinance firm SKS Microfinance makes a successful market listing debut on Monday.

The firm listed at 5% premium to its issue price of Rs 985 per share and went up by nearly 18% in the early trade before settling down. The stock closed at Rs 1,088.6, up by 10.52%, on the first day of listing at BSE.

The successful listing, that values the firm at around Rs 8,000 crore (or $1.7 billion), makes it one of the top 25 most valued financial services firms in India and the world’s second microfinance firm to go public after Mexican predecessor Banco Compartamos.

UNCANNY SIMILARITIES

What’s interesting is the similarities in both SKS and Compartamos’ journey to the public stock market. Both the firms’ issues were oversubscribed 13 times, both faced public ire including that from Bangladesh’s Mohammed Yunus considered as the father of microfinance, both had non performing loans of less 1% of the outstanding loans, both were approximately valued at $1.5 billion at the issue price and both received warm welcome from investors who pumped up their share price over 10% on the day of listing.

And that’s not all. There was at least one common banker involved in both the issues. Credit Suisse Securities, along with Kotak Mahindra Capital and Citigroup Global Markets, were the book running lead managers to the SKS Microfinance IPO. Credit Suisse also helped Compartamos to a successful IPO.

WHAT NEXT?

The next litmus test for SKS Microfinance will come from whether it continues the good run of its Mexican counterpart in the future. Compartamos that has seen its share price zoom 72% over the last one year is now valued at $2.6 billion. Its share price last traded almost two times the issue price of 40 pesos at which it went public almost three and half years ago.

Compartamos is trading with trailing earnings multiple of around 19 as per Bloomberg data. This looks much more competitive compared to the valuations of SKS Microfinance. SKS Microfinance at the current price is valued almost 40 times its FY’10 earnings or over two times compared to Compartamos, that doesn’t leave much room for gains unless investors start betting on it on its two-year forward earning expectations.

While purists will continue to point at chinks in the issue and the contradiction of showing profits carrot to investors from a business that is based on serving the poor, the listing of SKS Microfinance raises hopes for other microfinance institutions to look at raising money from the market rather than depending on donors or other routes to support their business.

Sequoia that made part exit with returns of over 16x in its three year old investment is now sitting on huge unrealised gains. It had invested through two funds SCI II Llc and SCIGI I with average cost of purchase pegged at Rs 61.18 and Rs 137.53 per share, respectively. SCI II was a part of the group of shareholders who together offered to sell a part of their holding in the IPO. At the latest price, SCI II is sitting on potential net gains of almost 17x while SCIGI I is sitting on unrealised net gains of over 7x.


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Indian Investors Buy SKS Story; Scrip Lists At A Premium

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