I have an Issue…actually several…..with the SKS Microfinance Issue !….Intentions may be Noble but Actions are Profit Motivated and not singularly Selfless !

I have two Primary Issues…and several related ones….. with this SKS Microfinance Primary Issue

  • Microfinance Industry emerged to alleviate Poverty by providing access of basic financial services like Loans and microinsurance to the poor…..I am frowning at this attempt to commercialise this Industry through an IPO at such a High Premium
  • I am not going to contribute to the Profits of Pre IPO Shareholders…especially Sequoia Capital…. who are offering for Sale their Shares in this SKS Microfinance IPO that has opened today !

    16.79 Million Shares are on offer in the price band Rs 850 to Rs 985 !….of which only 7.45 million shares are Fresh Issue with IPO proceeds going to the Company while 9.34 Million Shares are Offer for Sale by Existing Investors…In fact Sequoia Capital,termed as a Promoter, is offloading 3.99 million shares in this IPO of their 9.1 million shares and will bring down their holding from 14.1 % Pre IPO Equity of Rs 64.52 crs to 7.1 % of Post IPO Equity of Rs 71.97 crs….Their average acquisition cost is Rs 61.18 only and they have been allotted shares in 2007 and 2008 in three tranches at Rs 49.77,Rs 70.67 and Rs 103.91….Just Imagine….Sequoia paid just under Rs 56 crs for their 9.1 million shares….If Rs 985 Top end Price is fixed for this IPO,the 3.99 million shares they are offering on sale will fetch them Rs 393 crs !…so they make a whopping near Rs 337 crs over their aggregate cost  for shares held for just  two to three years and yet have 5.1 million shares remaining with them !…reminds me of a similar ploy by Citigroup and Chrys Capital in the Suzlon issue a few years ago ! (Search my blog for this)                                                                                                                   There is something not right in Promoters enriching themselves handsomely by part cashing out in the IPO or pre IPO….In fact the Chief Promoter,Vikram Akula sold 9.45 lakh of his Shares just this year in February 2010 to Tree Line Asia Master Fund (Singapore) for US $ 12.92 million (works out to @ Rs 637)…In fact several top Employees also sold part of their Esop shareholdings to Tree Line for Rs 636.72….Encashing Profits of Crores like this just before the IPO brings into question Promoter and Top Management Committment to the Company….Maybe Legal…but….Feels like they are itching to exit at Rs 985 as they may not get this price again!….and inside a year Shareholders have been allotted Shares even at Rs 300….from here to the Gains are over 200%….Even after the IPO,the Pre IPO Shareholders will hold nearly 77% of the Post IPO Equity….This would entitle them to 77% of the Networth….which would have been substantially built by the Public who are paying Rs 985 per share in the IPO !…Nah !…now why would the Public do this ! ?…they are merely looking at one side of the Equation that they will benefit from the Share Price above Rs 985….they fail to see that their Rs 985 is creating Huge Assets of which they will merely own 23%…..while 77% will be owned by Pre IPO Shareholders who have contributed in the past one to three years just an average acquisition price of  Rs 24.54 to Rs 137.53 (Promoters) and upto just Rs 300 for Non Promoters     

While contending with my emotions on the above two issues, the High,near obscene IPO Price Band of Rs 850 to Rs 985 makes it easier for me to say ‘No’ to this Issue

One pays such high Premiums for a Rs 10 Face Value Share only if excited on massive non linear growth in Profits coming up in the near future and significant scalability of Operations…..but when over half of the Shares on Offer are actually Offer for Sale by existing Shareholders,one needs to be on alert and say “Hey ! Hold On ! Let’s have a better look at this !”

At Top end Rs 985 the IPO Size is Rs 1650 + crs of which only Rs 734 crs will go to the Company…..Market Cap will cross Rs 7200 crs if listing is around these levels

In my humble Opinion,Rs 850 to Rs 985 is simply too high a Price to pay right now for SKS Microfinance,despite the scalability potential…have a look at the past five years selected financials

March 31

 

2010

2009

2008

2007

2006

PAT (Rs crs)

174.8

80.2

16.7

2.2

1.6

EPS (Rs)

27.1

17.9

5.5

1.6

1.2

 

 

 

 

 

 

Networth (Rs Crs)

950

665

212

71

16

Book Value (Rs)

147

139

48

27

11

 

 

 

 

 

 

At Rs 985

 

 

 

 

 

P/E

36

 

 

 

 

P/BV

6.7

 

 

 

 

 Now the Post IPO Equity will be Rs 71.97 crs and at Rs 985 Top end the Net IPO Proceeds that will accrue to the Company will be Rs 734 crs…thus Networth will move from Rs 950 crs at March 31,2010 to Rs 1730  + crs post IPO assuming Q1 Profits of Rs 50 crs…that’s a Book Value of Rs 240….this is a 4 Book Multiple of Top End Price of Rs 985

What SKS Microfinance is attempting to do with such a High Premium IPO is what Reliance Power and even Future Capital Holdings did in the past in 2008 !…Create High Networth through Obscene Premiums and Minimum Equity Dilution ….and both are quoted horribly below IPO Pricing….In fact Biyani’s Future Capital Holdings came at Rs 765 in January 2008…It’s Rs 247 today !…. 

However SKS Microfinance may not quote horribly below IPO Pricing because of scalability potential….in fact Rs 50 is the grey market Premium currently….Optimists can look at it this way…At March 31,2010 it showed  a Networth of Rs 950 crs and a PAT of Rs 175 crs…At March 31,2011 it will surely show a Networth of near Rs 2000 crs and a possible PAT of Rs 250 crs….that’s yet a high 28 multiple on a Possible FY 11 EPS of Rs 35 at Rs 985 IPO Price…now if it’s a straight double networth and double profits that means a PAT of Rs 350 crs,an EPS of Rs 49 and a Earnings Multiple of 20 !

I’m not recommending this Issue…but if you want to contribute to the Profits of Sequoia…be my guest !

An ABBA songs comes to my mind ” Money ! Money ! Money !…it’s a Rich Man’s World !”

Intentions of Promoters and Pre IPO Shareholders may be Noble….but Actions are clearly Profit Motivated and not singularly Selfless

Cheers !

 

7 thoughts on “I have an Issue…actually several…..with the SKS Microfinance Issue !….Intentions may be Noble but Actions are Profit Motivated and not singularly Selfless !

  1. thanks,thanks,thanks what else i can say.but to get this much of data how much time u will spend i dont know and to type this definitely i am sure that u get happiness by analysing things.i bow my head to u sir.only hope one day i must have the similar conviction and knowledge which u have now

  2. Highly informative post Gaurav, thanks for sharing.

    Just an interesting snippet between SKS and myself. In end-2006, SKS was head-hunting me to join them at a senior level. We had very advanced discussions – I even went and witnessed their operations for one whole day.

    I finally couldn’t get to say yes – primarily because I wasn’t able to resolve in my mind, the contradiction of making money on what I thought could be a noble cause (of providing financial inclusion to BPL families) and making money out of it didn’t settle well with me.

    By the way, as part of negotiations they had offered some thousands of shares. At today’s IPO value, it could have been anything in crores!

    Interesting, but don’t regret the decision at all.

    Som

  3. Hi Gaurav,

    Great analysis there on SKS.. just read an article on the IPO in the economist today.. interesting to see that such a large piece of the IPO is sale of existing shares when the company has claimed the purpose of the IPO is mainly to raise capital for the big demand in micro loans that its currently unable to meet.. and with their interest rates charged on loans greater than 20% no wonder theyre raking in such profits.

    I believe another microfinance company in Mexico set the precedent for IPOs in the industry with SKS following suit.

    Regards,
    Arzan

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