Stock Market India, Paisacontrol.com

IIFL has recommended investors to ‘Subscribe’ to the initial public offering of SKS Microfinance. The company has entered the capital market to offer 16,791,579 shares in the price-band of Rs 850-985 per share.

It plans to use the earnings to augment capital base to meet future capital requirements and to achieve the benefits of listing on the stock exchanges. The issue closes Monday.

“SKS Microfinance is the chief microfinance company in India with loan portfolio of ~US$1bn, 2,000+ branches spread across 19 states and 6.8 mn members. Its strengths include pan-India presence, scalable operating model, diversified product revenues and access to various sources of capital.

Lending first and foremost to poor women, the business model involves village centered group lending, thereby making sure a check on asset quality. The huge demand-supply credit gap and inability of banks to penetrate into unbanked areas have driven the growth of microfinance industry. Whereas valuations appear classy, the scalable business model, market leadership position and high earnings growth provide comfort. Recommend Subscribe,” the report said.

On the valuations front, the report added that the company is “valued at a FY10 P/B of 3.6x at the lower price band and 4.2x on the upper price band post strength. This is considerably higher as compared to average P/B for NBFCs at 2-2.5x, PSU banks (1-2x) and private banks (2.5-4x). International MFI companies have though traded at higher multiples due to their longer operating history and higher returns ratio. RoE for SKSMF at 21.7% (end FY10) is mostly in line with domestic NBFCs and banks.”