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N R Narayana Murthy's Catamaran May Invest In SKS Pre-IPO Sale

22 January, 2010

Infosys chief mentor N R Narayana Murthy’s $129-million venture capital fund, Catamaran, is likely to make its maiden investment in SKS Microfinance Ltd, which will be the first Indian MFI to hit the market with an initial public offering later this year.

The Catamaran investment is believed to be part of the pre-IPO sale process in SKS Microfinance, said sources privy to the development. The entry of a marquee investor like Murthy ahead of the public offering is expected to buoy investor sentiments as SKS and India’s microfinance sector are entering the unchartered waters of public markets. 

These sources declined to divulge the size of investment as well as any other financial details. But, venture capital trackers, who are not involved with the deal-making at SKS, said they would be surprised if the transaction was above $10 million.

SKS is heavily backed by venture capital and private equity majors such as Sequoia Capital, Sandstone Capital, Kismet Capital, Unitus Equity Fund, Silicon Valley Bank, besides Vinod Khosla. The Indian equity investors in SKS include Small Industries Development Bank of India, Bajaj Allianz Life Insurance and Yatish Trading. The total investment by the alternative asset investors in SKS is estimated at around $112 million till now.

VCCircle learns that foreign shareholding at SKS is pegged at 67.88%, with public financial companies having 3.48% and corporate bodies holding 4.91%. Others including trusts, management and employees have 22.88%.

A crucial SKS board meeting is scheduled in about a month to decide on the IPO timelines, and possibly discuss fresh equity placement. The IPO will prove to be an exit route for the private equity investors. But, analysts say, typically IPOs only see partial exits by the investing community. The company will file the draft red herring prospectus with market regulator SEBI soon.

E-mails sent to Mr Narayana Murthy’s office and SKS chief executive officer Suresh Gurumani did not elicit any response at the time of filing this story.

SKS Microfinance, founded by Vikram Akula on the operational model of McDonald’s and Starbucks in the microfinance space, has guzzled capital to reach where it has today. A venture investor in SKS, without wishing to be quoted, says, the journey from servicing sub-10,000 clients to nearly 5 million today in less than a decade has proved the scalability of this model.

Since microfinance entities such as SKS, which got converted to an NBFC and works on commercial principles, are not allowed to raise deposits, they have to raise equity capital to grow scale and follow the capital adequacy norms (12% prescribed by RBI). “The IPO route is the final destination. You cannot keep raising private capital,” said an industry observer. Most VC/PE investors have an investment horizon of about five years although this sector may be see them stay put a bit longer.

For the IPO exercise, SKS Microfinance is understood to be working with Citigroup along with Kotak and Credit Suisse, which incidentally helped the world’s first MFI Mexico’s Compartamos to a successful IPO. Compartamos was valued at $1.5 billion at the time of public offering in 2007. The investors in the Mexican firm sold 30% stake netting $450 million on an original investment of $6 million made by them in 1998-2000 period, according to a note by CGAP (Consultative Group to Assist the Poor) on this watershed public offering.

So, comparisons between SKS and the Mexican company are bound to arise given the fact that there are no previous benchmarks in this space. An MFI veteran, however, says, it is not an apple-to-apple comparison as the Mexican firm disbursed loans at over 80% interest rates while in India (including large players like SKS), the rates hover around 26%, a subject of much criticism as MFIs themselves borrow loans from banks at around 12.5%.

“The IPO valuation of SKS will definitely be keenly watched as it could set a trend for future IPOs by established players in the micro lending space. The large and continuing growth opportunity, high RoEs and fee income potential of MFI players continue to attract PE investor interest. The lack of proper credit information owing to the absence of an organised credit bureau presently, risk of loan rotation owing to overextension of credit and challenges in retaining current lending rates are the risks to this story,” says Akshay Dixit, Vice President at MAPE Advisory Group, who worked on some recent private equity transactions in the microfinance sector. 

Temasek’s investment in Spandana last year appears to have come at about ten times forward price to its earnings, and a similar yardstick for a bigger player like SKS could see it attracting 11-13 times price to earnings. 

“Private placement valuation in Tier-I MFIs like SKS or Spandana is done mostly on forward price to earnings with price to book value used as a cross check. But in the case of small-to-mid-tier ones, it is done on (trailing) price to book value, owing to higher expected profit growth rates off a lower base – while there is steam left in the profit growth of large players, the velocity of growth could be much higher for smaller MFIs ” adds Dixit. 

SKS posted revenue of Rs 385 crore in the April-September 2009 period against Rs 554 crore for the full fiscal year at the end of March 2009. The profit after tax for the half year period (April-September 2009) is Rs 55.6 crore against Rs 80.22 crore in 2008-09. Its return on equity is 15.5% in the first half this fiscal. SKS, which disburses an average loan size of Rs 10,000, has disbursed a cumulative sum of $2.4 billion (Rs 11,208 crore) as on November 2009. Its loan outstanding stands at Rs 3,590 crore, according to information on its website. The company’s profit after tax has literally leapfrogged from Rs 44 lakh in 2005-06 to Rs 80.22 crore in 2008-09. The return on equity too has been in the high teens in this period.


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N R Narayana Murthy's Catamaran May Invest In SKS Pre-IPO Sale

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