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The company is a NBFC registered with RBI and has its primary focus on Microfinance. It is one out of
the top 10 MFIs in India by the total loans outstanding. Recently two of the most reputed FIIs – UK
Based Investment firm – Elara Capital and Standard Chartered Bank have picked up 5.22% and 9.87%
stake in SEIL. Looking at the future growth potential of Microfinance, this stock is available at an
attractive valuation.
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Table of Contents
It is just that banks are hesitant in lending to them and the loans
amounts are usually very small. Also, the unprivileged people have
the mindset that they are not the ones, the banks will ever care for.
But, things are changing along with the changing times.
Contd…
Microfinance is the hotspot of private equity deals. Can you believe that more than 40% of the private equity
money that came into India in the last 18 months went into the Microfinance sector? But the truth remains that, in
spite of huge money flows into the sector, the sector is able to address only 10% of the total demand in the
country.
The total demand for microfinance is currently estimated at around 60 billion USD, out of which not even 6 billion
USD is addressed. In such a high growth sector, we are happy that we have found a very good investment avenue
for our subscribers.
The 10in3 pick for this month is SE Investments Ltd. One can invest 75% of their allocation at the CMP
and the rest 25% can be invested at 200 levels or lower.
Most of you would remember that we had once advised our readers to avoid this counter. But then, stock markets
are all about perceptions and perceptions do change. Our perceptions on SEIL have changed dramatically and we
have explained the same in this report.
SEIL is one of the MFI s which is currently possessing tremendous value and is largely undiscovered. When I say
undiscovered, I mean only the retail investors. The FII s, true to their nature in spotting the opportunity very early,
have spotted SEIL and have picked up 15% stake in the company. But then, HBJ Capital was also almost there and
now, we wish you would also be part of the story.
On the other hand, rural and borrowers from the bottom of the pyramid felt
that banking procedures were cumbersome and that banks were unwilling to
give them credit. However, it was not until the early 1990s, that things went
for a change. The Indian government realized the need for micro finance to
provide rural poor with savings and micro credit services.
In the late 1990s, the micro-finance business was boosted by the innovative
initiatives taken by non-government micro-finance institutions (MFIs) and
banks. They offered micro-credit i.e. credit provided to poor people for
financial and business services and for self-employment in rural areas.
The term microfinance refers to small scale financial services - both credit
and savings, that are extended to the poor in rural, semi-urban and urban
areas. Micro credit is the most common product offering from the MFIs.
MFIs are the main players in the microfinance space in India; their
primary product is microcredit. Other players that extend microfinance
services, in addition to their core business include banks, insurance
companies, agricultural and airy co-operatives and various NGOs.
MFIs – Business model and working
Lending Model - In terms of the lending model, MFIs may be classified as
lenders to groups or as lenders to individuals. In India, MFIs usually adopt
the group-based lending models, which are of two types - the self - help
group (SHG) model and the joint - liability group (JLG) model.
The most popular JLG model is the Grameen Bank model. However, most
of the large MFIs in India following a hybrid of the group models.
Loan repayment - Most MFIs following the JLG model adopt the weekly
and fortnightly repayment structure.
Those under the SHG model have a monthly repayment structure. MFIs
lending to traders in market places also offer daily repayment, while MFIS
extending agricultural loans have bullet and cash flow based repayment
structure depending on the crop patterns.
MFIs – Business model and working - contd
Legal Structure - Interest rates - MFIs following the JLG model charge flat
interest rates of 12 to 18 percent on their loans, while the
MFI s following the SHG model charge 18 to 24 percent as
interest on a PA basis and reducing balance method.
MFIs in India
Microfinance in India – The Scenario
Though there are 1000s of MFI s operating in India under various legal
formats, Only 2% of them have a substantial clients base of more than
100,000. Also, close to 90% of the MFIs serve less than 10,000 clients
in India.
The microfinance sector and the MFIs in India are estimated to have
outstanding total loans for around 18,000 crore.
The top 10 MFIs account for more than 75% of the total loans
outstanding.
Asset Quality - The key takeaway from the tremendous growth from
the sector is that in spite of such aggressive disbursements and expansion
in loan books, the asset quality has been healthier.
MFIs' asset quality indicated by the current portfolio and the portfolio at
risk (PAR) by more than 30 days, has improved and is healthier than
those of other financial service players in India.
The healthy asset quality can be attributed to the strong group pressure
and efficient collection mechanisms which have ensured very high
repayment rates.
The OSS ratios are believed to increase due to the increased lending rates
and the collection of processing fees.
MFIs adopting the JLG model have higher lending rates and therefore
higher OSS ratios than the ones with SHG model.
Most of the MFIs that follow the SHG model provide credit that is cross-
subsidized by other developmental programmes. Hence their operating
expense ratios tend to be lower that less than 5%.
However, the larger players have been extending their presence to states
such as Maharashtra, Orissa, West Bengal and some NE states in the
recent years.
However, south continues to be the largest market for the MFIs and
Andhra Pradesh along with Tamil Nadu contribute to most of the growth
in disbursements and the loan books.
The company is a NBFC registered with RBI
and has its primary focus on Microfinance.
The company is one out of the top 10 MFIs in
India by the total loans outstanding.
SE Investment Limited
SE Investments Ltd (SEIL)
Sunil Enterprises Investments Limited – SEIL is registered as a category “A”
– deposit taking NBFC with Reserve Bank of India. Initially, it was
promoted as a private limited company under the Companies Act, 1956,
on 05th March, 1992.
The company which forayed into the Microfinance division in the year
2006 has a proven track record and is counted as one of the top 10
Microfinance companies in India, based on the total Loan amount
outstanding at the end of financial year FY 09.
The company has been successful in its microfinance division and it can
be attributed to the fact that the company has been engaged in
providing financial services and lending products since 1992.
PE – 6.48 (There is tremendous scope for PE rerating in Total # of shares – 52.4 lac shares
the stock.)
Liquidity – Low to Medium (number of shares traded
EPS – Rs. 59.13 (Based on TTM basis. We expect the usually ranges between few 1000s to 10K shares. The
net earnings of the company to grow at a CAGR of stock has also shown volumes in excess of 10K on many
50% in the next 3 years.) days. However, many times, the volumes tend to be lesser
than 1000 also)
52 Week High / Low – 144 / 374.75 (The stock
made its life time high of 570 in Sep 2008. However, Website: http://www.seil.in/
the October carnage pulled down the stock price to its
lows.)
Business Verticals
Business Verticals – Alternate energy
Alternate energy - The company has invested Rs16.4 crores (Rs12.6 crores during the 2004-05 financial year and
Rs3.8 crores during the 2005-06 financial year) in wind energy generation in windmills in Karnataka and Jaisalmer.
During FY 2005-2006, a new wind energy generator was set up in Jaisalmer. The total inflow from the sale of
energy was Rs2.4 crores during the last financial year.
The company also proposes to initiate bio-gas based electricity generation plants in the current financial year. These
plants will utilize the bio waste generated in the clients’ agricultural lands (crop wastes) and the bio waste
created by the cattle.
However, it should be noted that the company forayed into the alternate energy division prior to the foray into
microfinance division and that no major expansion plans were laid out after FY 06.
Currently, the alternate energy division especially wind mills are used only for the tax reduction purpose. For the
financial year FY 09, this division contributed to less than 5% of the company’s revenues. However, there may be an
increase in revenues from this division through the bio waste projects.
Business Verticals – Business Loans
Business Loans – This business segment contributed to less than 30% of the revenues in FY 09. However, after the
foray into the Microfinance segment, the focus has mostly shifted to this new division. Business Loans segment
contributed for around 60% of the revenues of the company in FY 06 and it came down to around 30% in FY 09,
owing to the increase in Microfinance division.
However, this vertical provides strong margins to the company, since the interest rates for the products under this
division is usually between 16% and 33%. This business division continues to be a strong contributor for the high
margins for the company.
Due to the higher loan amount size (greater than 20K and 1 lac), this is not categorized under the microfinance
division. However, most of the clients here have the same profile as the microfinance customer.
Business Verticals – Business Loans (contd)
Microfinance – The company forayed into the Microfinance division in the year 2006 and since then the company
has witnessed strong growth rates in the number of clients, total loan outstanding, loan book size and revenues.
This division contributed to around 65% of the revenues for the company in FY 09, which increased from the neat
50% in the financial year FY 06.
The company has a clear emphasize on this division, which can take the company on the strong growth path in the
years ahead. This division will be a strong contributor to the revenues, while the business loans division will be the
strong contributor to the margins and the net earnings.
In the financial year FY 09, the company had total loan disbursements of around 226 crore recording a 43% jump
over the previous year.
Clients
SEIL has witnessed strong growth rates in the number of clients. The company is
part of the just 2% of the MFIs with more than 100,000 clients.
The Microfinance loan products are the largest contributors with around 65% of the revenues in FY 09, followed
by Business loans at just less than 30% of revenues and Personal loans along with the alternate energy division
contributing for the rest.
The Daily recovery loan scheme contributes for very negligible percentage.
While the Business loans contribute for higher margins in operations, the Microfinance loans support the strong
growth in the revenues.
The interest rates for microfinance loans are believed to have gone up from 14% to 16% in the recent months.
Portfolio Statistics
In the last five years of operation leading to Mar 2008, SEIL’s portfolio (including securitized portfolio) has grown
10 times at a CAGR of 77% PA from Rs19.7 crore on March 2004 to Rs192.8 crores as on 31 March 2008 and to
around 250 crore by the end of the fiscal year FY 09.
The average outstanding loan size has decreased from Rs27,357 on March 2007 to Rs22,333 as on 31 March
2008. This is because of the increased proportion of microfinance loans in the overall portfolio.
Fund mobilization – Deposits and Equity
The access to funds is one of the key driving force behind the company’s growth
rates and its success. Hence, it becomes pivotal to understand how the funds are
mobilized.
The three primary sources of funds have been Deposits, Bank Loans and Equity.
Deposits - The company accepts fixed deposits from the public as well as from
companies. The total deposits outstanding (including inter corporate deposits) at
the end of the financial year FY 09 was Rs43.0 crores.
The contribution of public deposits on the total deposits have decreased from
87.3% on March 2005 to around 25% on March 2009 while the proportion of
inter corporate deposits have increased from 12.7% in March 2005 to around
75% on 31 March 2009.
Equity – Since the IPO of the company, the company has not been making using of equity to raise funds for
operations. However, there have been changes in this context and the company has started using equity to raise
funds.
We believe that the company will continue to make use of the Equity allocation route to raise money in the future.
During the financial year FY 09, the Company made a preferential issue of 25 Lacs 10% Non Cumulative
Redeemable Preference Shares of Rs. 10/- each at a premium of Rs.90/- per share after taking the approval of
members in their Extra-Ordinary General Meeting held on 29 December 2008. By this issue, the Company has
raised the funds for an aggregate amount of Rs.25 Crores for its growth objectives. The company has also been
issuing equity shares to foreign investors to raise money.
Fund mobilization – Bank Loans
As on 31 – 03 - 2009
Banks as part of their obligations towards priority sector and as laid out by RBI, have to provide at least 40% of their
total lending portfolio to priority sectors such as Agriculture, Exports, Rural and the Poor. In order to meet the
obligations, most of the banks lend to the MFIs which in turn provide microfinance to the poor, rural and agri
households.
SEIL had borrowed funds from diversified sources. The total outstanding borrowings had increased from Rs57.9
Crores on March 2007 to more than Rs125 Crores as on 31 March 2009.
In the financial year FY 09, HSBC Bank and Punjab National Bank were the newer ones to start lending to SEIL
through Term loans.
Staff Productivity
The staff productivity of SEIL is good at 402 borrowers per field staff as on 31 March 2008.
The company has shown impressive improvements in productivity over the years with the Number of borrowers /
Field Staff improving from just 90 at the end of FY 06 to 402 at the end of FY 08.
As their staffs become more familiar with microfinance, their productivity is expected to grow.
Credit Performance and Portfolio Quality
SEIL has good portfolio quality with an overall repayment rate of 97.9%. PAR (> 60 days) was 1.6% as
on 31 March 2008 against 2.4% on March 2007. The ratio of total overdues to the total loan outstanding was
0.9% as on 31 March 2008.
The figures in the above table suggest that the organization has good recovery mechanisms, which enables it to
recover most of the overdues within 30 days.
There is nothing as perfect in the world of
investment. Each and every investment option
would carry both positives and negatives factors
which would affect the company in the years to
come.
Defining Factors
Defining Factors – Demand Supply mismatch
With a 3 year time frame, we believe that the following would strongly
impact the company and define its growth. These factors will also be the
key reason as to why SEIL has the opportunity to be a wealth creator.
This assumption takes into account that there are 150 million poor
households in India, with an average credit demand of 20,000 rupees.
However, the supply from the sector is just 10% of the demand and the
demand outstrips supply by a large extent.
We believe that the demand will continue to rule higher than the supply
for many more years to come, thus paving the way for a strong growth of
the MFIs involved.
The huge demand supply mismatch will make sure that the companies like
SEIL record very strong growth rates at least for the next 3 years.
Foray into Micro housing segment
Similar to microfinance or micro credit, micro housing is a huge untapped market in India. It is to be noted that more than
90% of India’s work force will come under the micro housing segment. Again, very similar to microfinance, this space
is hugely untapped, with demand outstripping supply by even larger extent. It is also true that the supply is very
less or negligible.
SEIL has forayed into the Micro housing segment where it will provide financial support to total areas of about 300 to 350
square feet. The financing is based on regular interest payment and principle payment as per convenience.
The client usually pays the interest equivalent to the rent he currently pays for living in a slum / shanty. The
micro housing segment of SEIL is currently in the pilot phase with around 500 units at Agra, UP.
Also, the intention of SEIL to have a presence in the micro housing segment becomes more evident with the amalgamation
of Unnati Financial Services. This company that will be part of SEIL from the current quarter has huge experience in the
micro housing segment.
The story of Affordable housing is panning out in a big way and the total market for this segment is pegged at around
300,000 crore by 2011. It is highly likely that the micro housing initiatives of SEIL and other MFIs will serve the bottom of
this pyramid.
PE re-rating
Currently, the market cap of the company is 120 crore, with around 52.4 lac
shares of Rs.10 each. The company witnessed an increase in the market cap and
the equity base last week, when Unnati financial services was merged with SEIL.
Prior to that, there were only 31.4 lac shares in the company and the market
cap was only 72 crore. On a TTM basis, the company was available at a
valuation of just 3.88 on net earnings of around 18.57 crore. However, after
the amalgamation, the current valuations is 6.88.
Since the current financials does not accommodate the numbers from
the new entity and since that foreign investors came in prior to the
amalgamation, we will base our PE rerating views on the company
numbers prior to amalgamation.
The new entity – Unnati financial services’ contribution to the top line and the
bottom line will be visible only from the current quarter. However, the presence
of merged entity is already accounted through the changes in the market cap,
number of equity shares and the book value.
Also, our expected ramp up in net earnings due to the amalgamations may
reduce the valuations of SEIL to the older levels. (at the CMP)
PE re-rating – Foreign Investments
Many of you would remember that we had come out with an article on SEIL, where in we advised the readers
to avoid it. One of the foremost reasons for our call, has been that in spite of business looking good, the
company was not able to attract any foreign investments or private equity money as such.
We were really discouraged by the fact that even though Microfinance contributed for more than 50% of the Private equity
money that came into India in the last 1.5 years, SEIL was not able to attract even a single rupee. This negative factor indeed
lead us to believe that something may be wrong with the company in spite of the very good valuations and the huge value
that the stock had.
However, our questions were answered and SEIL has attracted foreign investments. Its just that we were very early in
indentifying the happenings.
Two of the most reputed FIIs – UK Based Investment firm – Elara Capital and Standard Chartered Bank have
picked up 5.22% and 9.87% in SEIL very recently.
The company which did not have any FII participation just 2 months back is now have FII holdings to the extent of 15%. It
is to be noted that Standard Chartered Bank in spite of picking up 7.67% from the promoters, it was not happy that it went
on buy another 2.20% from open market.
It is highly likely that SEIL will continue to attract foreign investments and hence more interest on the stock, leading to a
very good ramp up in valuations.
PE re-rating – Listing of Peers
One of the foremost reasons as to why SEIL’s valuations are lower is that the
company is the lone MFI listed on the exchanges. Though this status should have
increased the premium for the company, that has not been the case, since there were
many other MFIs operating that were not part of the exchanges. While that has been
the case with the institutions, not many retail investors really know that a company
named SEIL is into Microfinance and that it is listed.
However, as and when more and more MFIs take the listing route and when
Microfinance becomes a listed sector, we will see SEIL garnering more attention. We
believe that these changes will take place in the next one or two years time.
The microfinance sector has been so hot that it accounted for more than 40% of all
the private equity deals in the last 20 months. As more and more foreign money
started chasing the MFI s, the valuations and the asking rate were on a constant
increase and it has achieved a stage where in the investors absolutely do not find
value in it. The asking rate from the MFI s have increased to the extent of 7 times
the book value. Due to this very reason, the PE funding has highly dried up to the
companies in this sector in the recent months.
Many MFI s may list soon - Not only the industry leader - SKS Microfinance, but
many of the other for-profit MFIs have received private equity investments. The
kind of growth that the companies are witnessing and the huge capital pressure
coupled with PE players asking for exit routes may result in a slew of listings from
this space in the next 2 years time.
Also, it is to be noted that most of the top 10 MFIs in the country have been
publishing audited financial results and their balance sheets.
Amalgamation of Unnati Financial Services
After receiving all the necessary approvals from the share holders and the
High Court in Delhi, SEIL had merged Unnati Financial Services, a promoter
group company with itself. Unnati Financial Services is a company with a
very rich experience in Micro housing segment and possesses the technology
of bio-power production using bio gas.
For the purpose of Amalgamation, the company had allotted 21 lac shares
of Rs.10 each to the share holders of Unnati Financial services. Consequent
to the allotment, the paid up equity capital of the company stands
increased at 7.7 crore comprising of 52.4 lac shares of Rs.10 each and 25
lac 10% non cumulative redeemable preferential shares.
Unnati financial services had the same board as SEIL and it is highly likely
that they shares the same promoters as well.
We believe that SEIL will be highly benefited from Unnati’s presence and
experience in Micro housing and bio power production. Also the
operational cost of SEIL is likely to come down going forward.
The amalgamation also falls in line with the plans of the company to
promote biogas and bio fertilizer business across its operational area thus
generating employment and micro credit – simultaneously serving the
energy needs of the client households.
A smaller company like SEIL has scored well in
comparison to its peers on many operational
parameters.
Peer Comparison
Peer Comparison
SEIL is the 7th largest MFI in India (excluding SKDRDP which is a trust) based on the Loan amount outstanding as on Mar
31,2009. It is very evident from the above comparison that SEIL can rub shoulders with many of its larger sized peers on
various parameters. For Ex – SKS with around 3900 crore of disbursements, 17 times that of SEIL, has managed to make
revenues of only 554 crore – 11 times that of SEIL.
The margins of SEIL is way higher than that of its peers mainly on the reason that its areas of operations are concentrated
when compared to the Pan India presence of most of its peers. Also the operating expenses of SEIL is much lower.
Though SEIL, 7th largest MFI makes net earnings that is greater than the 5th largest MFI, there are point where SEIL needs
improvements.
The customer base of SEIL is very low when compared to its peers. Also, the company, being conservative does not leverage
itself very much. The Debt / Net worth ratio is the lowest, indicative of its conservative stand on the business.
Overall, SEIL, in spite of its smaller size, stands well against its peers on many parameters and it needs to
concentrate on geographic expansion and leveraging its networth.
The company’s balance sheet suggests that it is
conservative in nature. Also, SEIL has a good
headroom to leverage itself.
Financial Analysis
Profit and Loss Statement - Yearly
Both the Sales and the net earnings have more
than doubled in the last 3 years.
During last two years, stock has made its life time high of 570 in Sep 2008. However, the October carnage pulled
down the stock price to its lows.
From May-Sept’09 it was trading below 100 DMA but after some bulk deals and you can see increased volume in
Sept’09, the stocks price is well above 100 DMA. There is strong support at 200 levels & it can find resistance above
300.
Last 6 months chart
At CMP of 229, stock is trading in overbought zone. This upward momentum is likely to continue till 300 levels,
above which it will find tough to sustain.
One can invest 75% of their allocation at the CMP and the rest 25% can be invested at 200 levels or
lower.
Any investment for capital
appreciation carries an associated risk
with it. What are the risks that could
derail the growth prospects for this
company?
Access to funds– SEIL, like any other MFI will face funding pressure to keep up
the growth rates. More than access to funds, it should make sure that the funds are
available at a reasonable cost. Currently, SEIL is unable to garner funds at lower
costs, when compared to its larger peers. Though there will be increase in funding
from banks, the demand will only be much larger going forward.
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