SE Investments Limited [Code 532900]

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.

HBJ Capital, India

Web: www.hbjcapital.com
Mail: Info@hbjcapital.com
Call: +91 98867 36791
Best Buying Price…

2 Phase Systematic buying suggested [Always buy in SIP ways]

Phase – 1 : Buy around Rs225-235 [75% of your planned investment]

Phase – 2 : Accumulate further below Rs200 [Remaining 25% of your

planned investment]

>>>Expect at least 10 times returns in next 3 years time frame!!!

 HBJ Cap is growing
faster than ever.
HBJ Capital can be your
50x in 3years
investment.
Ask how?

Aim to become #1 -
Equity Research
Company in India
by 2012, the same
year we have
planned to get it
listed at BSE/NSE.
What Next?
HBJ Capital – “Specialists in discovering multibagger stocks” is launching
more & more innovative products & services with single focus on long term
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 Table of Contents

 From the desk of CEO, HBJ Capital.

 Financing the Poor and Unprivileged – Page#7
 MFI s in India – Page#13
 SE Investments Ltd – Page#17
 Business Verticals – Page#20
 Insights into Operations – Page#27
 Defining Factors– Page#34
 Peer Comparison – Page#41
 Financial Analysis – Page#43
 Share Holdings pattern – Page#47
 Best Buying Price – Page#50
 Challenges / Risks involved – Page#53
 Know more about Your - HBJ Capital.
 From the desk of CEO, HBJ Capital
Microfinance as a sector has
been growing at very impressive
growth rates. The sector is
completely supply driven and
the demand is far outstripping
the supply. Considering that the
sector as such grows at a very
high CAGR of 50%, it would
take at least 7 years to fulfill the
current demand. SEIL is the 7th
largest MFI in India. It is good
that I will invest, just after the FII
s.
Dear Investors,
How many times we have cribbed the banks for asking us too many
documents while applying for any loan? How many times we feel
irritated going back to the banks again and again to get the closure
and the approval for the loan that we had applied. But, never
mind, the truth remains that we are all highly privileged people.
Consider the fact that there are millions and millions of households
in India, to be more precise – more than 150 million households
with absolutely no access to credit. These are people who are
extorted by local money lenders who get at least 36% interest PA.
Now, tell me, are we not the privileged ones ?
These millions and millions of households do not get access to credit
from banks that you and I get. The reason is not that they cannot
repay the loans. How is it then that most of the MFIs boasts of
repayment rates of more than 99%?
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.

Kumar Harendra, CEO, HBJ Capital,

www.hbjcapital.com
5th Main, Girinagar, BSK 3rd Stage, Bangalore 85; Call : 098867 36791 or Mail : Info@hbjcapital.com
 The huge Indian population which was once
seen as a curse of the country is now touted
as the boon for the country. Similarly,
financing the needy and the unprivileged,
which was once looked down upon, is now
touted as the biggest financing opportunity.

Financing the poor and

unprivileged
Financing the unprivileged
India has one of the most extensive banking infrastructure in the world.
However, million of poor people in India do not have access to the basic
banking services like savings and credit. In the past, both public and private
commercial banks in India perceived rural banking as a high-risk, high-cost
business.

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.

Nevertheless, the existing banking policies, procedures and systems including

deposit and loan products remained untailored to the requirements of the
poor. They required better access to services and products rather than
subsidized credit.

It was, therefore, recommended through the conclusions drawn in a study

by NABARD that alternative policies, systems and procedures be put in
place in order to boost the growth of micro-finance in India.
Welcome to Changing Times
With the recommendations in place, commercial banks were enabled to
move into rural areas, albeit the advances given to the poor remained low.

To improve accessibility of the existing banking network to the poor, the

Self Help Group (SHG)-Bank Linkage Model was launched in 1992 to
facilitate empowerment of the poor, while pursuing the macro economic
objective of overall economic growth.

Currently, a range of institutions in both the public sector and private

sector offer micro-finance services in India. Such institutions are broadly
categorized into two categories, namely: formal institutions and informal
institutions.

The former category comprises of Apex Development Financial Institutions,

Commercial Banks, Regional Rural Banks, and Cooperative Banks that
provide micro-finance services in addition to their general
banking activities.

The informal institutions that undertake micro-finance services as their main

activity being referred to as Micro - Finance Institutions (MFIs). Whilst both
private and public ownership can be found in the case of formal financial
institutions offering micro-finance services, the MFIs are mainly found in the
private sector.
Birth of MFI – Micro finance institution
CRISIL pegs the number of households facing financial exclusion in the
country at around 120 million. Over the past decade alone, microfinance
has played an important role in filling this gap. MFIs are uniquely
positioned to facilitate financial inclusion and provide financial services
to the poorer clientele.

There are no comprehensive legal frameworks for the microfinance

sector in India. MFIs exist in many legal forms. However, most of the
large MFIs are acquiring and floating new companies to get registered as
non banking financial companies – NBFCs, which will help them achieve
scale.

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.

In India, most of the microfinance loans are in the range of 5000 to

20,000.

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.

In the SHG model, the MFI lends to a group of say 5 to 20 women.

Under the JLG model, loans are extended to and recovered from, each
member of the group.

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.

The model of lending to individuals is similar to the retail loan financing

model of banks. In this model, the MFIs usually lend to highly credit
worthy individuals who have shown their repayment ability through loans
already.

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.

Some of the MFIs also charge a processing fee comprising

a certain proportion of the loan amount sanctioned at the
time of disbursement.

Product offerings - Most of the MFIs in India are solely

engaged in extending microcredit; a few also extend
extensive savings, insurance, pension and remittance
facilities.

MFIs offer savings services in two ways - the savings are

either collected by the MFI or the SHG. In the latter
method, the MFI or NGO encourages the SHG to collect
savings from each member of the group.

AN MFI collecting savings from borrowers may either

make it compulsory for borrowers to have savings with it.
 Regionally speaking, India is the largest
microfinance market in the world with
millions and millions of poor households.
Yet, only 2% of MFIs have more than
100,000 borrowers and the demand is far
outstripping supply. Is this called
opportunity?

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.

Very Strong Business growth - The microfinance market in India is

expected to grow rapidly, supported by the government's initiatives to
achieve greater financial inclusion and growth in the country's retail
sector. The microfinance sector in India has passed its evolutionary
phase and now the profit oriented working model of the MFIs are
widely accepted.

The microfinance sector and the MFIs in India are estimated to have
outstanding total loans for around 18,000 crore.

The microfinance sector in India is highly fragmented with more than

4000 MFIs, NGOs and NGO-MFIs, of which about 400 have active
lending programmes.

The top 10 MFIs account for more than 75% of the total loans
outstanding.

Just 17 MFIs had outstanding loans of more than 100 crore as on

March 31,2009.
Disbursement and Asset Quality
Disbursements - At the end of the financial year FY 09, it is estimated
that the MFIs' outstanding loans have almost doubled to around 11,400
crore. The growth in disbursements by MFIs was more than that of any
other legal formats.

MFIs' disbursements have increased aggressively at a CAGR of around

90% over the last 4 years. The overall disbursements during the financial
year FY 09 is estimated to be around 28,700 crore of which 18,500 crore
were made by MFIs.

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 MFIs' current portfolio has improved on account of several factors.

MFIs' business volumes improved by around 46% during the first half of
FY 09, while the disbursement increased by around 90% and the loan
portfolio by 81%.
Earnings profile and Geographic concentration
Improvement in earnings profile - Improvement in lending rates and
productivity have helped the MFIs to enhance their operating self-
sufficiency ratios.

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%.

Geographic concentration - Majority of the MFIs, including the larger

players, operate mainly in south India until few years back.

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.

On 01.03.1995, fresh certificate of incorporation, consequent upon

conversion to Public Limited Company was granted by the office of the
Registrar of the Companies, Uttar Pradesh, Kanpur.

The company has business interests in microfinance, financial services and

Alternate energy. However, the current focus and the road ahead for the
company is based on the Micro finance division.

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.

The microfinance operations of the company is concentrated in parts of

Uttar Pradesh, Delhi, Gujarat and Rajasthan.
 SE Investments Ltd – Snapshot (Nov 22 2009)
CMP – Rs. 229.80 (The stock price currently holds
tremendous value. There is a strong support for the
stock price at 200 levels.)
MCap – 120.42 crore (When we started working on
the report, the stock was commanding a market cap of
70 crore. It was only then the amalgamation of Unnati
financial happened, increasing the market cap. We
expect increased earnings due to this amalgamation.)
Face Value – Rs. 10
Promoter’s holding – 31.05% (With the recent
amalgamation, we expect that the promoter’s holding
will increase to around 60%)
FII’s holding – 15.09% (Two of the most reputed FII s –
Elara Plc and Standard Chartered Bank have picked up
stakes in the company very recently.)

PE – 6.48 (There is tremendous scope for PE rerating in
the stock.)
EPS – Rs. 59.13 (Based on TTM basis. We expect the
net earnings of the company to grow at a CAGR of
50% in the next 3 years.)
52 Week High / Low – 144 / 374.75 (The stock
made its life time high of 570 in Sep 2008. However,
the October carnage pulled down the stock price to its
lows.)
Total # of shares – 52.4 lac shares
Liquidity – Low to Medium (number of shares traded
usually ranges between few 1000s to 10K shares. The
stock has also shown volumes in excess of 10K on many
days. However, many times, the volumes tend to be lesser
than 1000 also)
Website: http://www.seil.in/

The calculation of PE based on EPS and net earnings will

not lead to the same market cap, since the EPS for the
last 4 quarters does not reflect the amalgamation yet.
 The company operates in three segments –
Microfinance, Business loans and Alternate
Energy.

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)

• Focus on a large clientele of small businesses, family run

enterprises and traders
• Transactions are based on qualitative and quantitative
assessments
• Focus on credit history, local knowledge of the
operating segment and an understanding of the
performance of the entity
• Pricing reflective of the risk assessment of the client
• Competitive advantage of fast and efficient decision
making
• Quick processing
• Robust reminder and collection process

Growth fuelled by Inter corporate deposits -

 Business Verticals – Microfinance

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 company envisages on supporting 400,000 households through various

microfinance schemes by the end of 2010.
Microfinance with a difference
 Since the company is a NBFC from
Microfinance segment, it becomes pivotal
to understand about the various loan
products, how funds are mobilized, the
staff productivity and the quality of the
portfolio.

Insights into the operations

 Various financial products

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.

It is here that we make sure that the positive factors

have a overwhelming impact on the company.

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.

Strong Demand from the microfinance sector – A recent report from

the world bank states that the existing demand for micro credit in the
country is 60 billion USD.

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.

It is estimated that the number of borrowers is estimated to touch 35

million in March 2011 as against 21 million in March 2009. Resources will
be a key challenge as MFIs would need borrowings of more than Rs
65,000 crore over the next two years.

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.

Even though we will consider the valuations prior to amalgamation, it should

be noted that the valuations after amalgamation at 6.88 is still lower and
promises 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.

The net earnings for FY 09 actually grew by

46%, considering the fact that net profits for
FY 08 was increased due to the company
deferring taxes for around 2 crore.

The company has been increasingly becoming

more efficient with the operating margins
increase from 70% in FY 07 to 76% in FY 09.

Also, the net margins have seen an increase

from around 24% in FY 07 to 28% in FY 09.

On a AS-IS basis, for the next 3 years, we

expect the company to grow its earnings at a
CAGR of more than 45%.
Profit and Loss Statement - Quarterly
The company has been witnessing strong
growth rates in the last 2 quarters due to
the infusion of fresh capital into the
company.

For the last 2 quarters, the company has

reported net earnings growth of more
than 75% on a more than 50% increase
in sales.

Also, the key efficiency ratios are on a

constant upward move.
Balance Sheet
The net reserves of the company has been on a
growth path. It had even doubled in the latest
financial year.

The net worth of the company is very strong and

the Total debt / net worth of the company is just
2.3 and this would enable the company to fuel
growth going forward.

The FY 09 balance pegs the total outstanding

loans as on Mar 31, 2009 at around 195 crore.

The company has been assigning enough

provisions in its books. Though the company
wrote down only 2 crore in the Financial year FY
08, it has provided provisions for around 3.8
crore.

The balance sheet clearly suggests that the net

worth and the assets of the company have
increased impressively and the company has been
conservative and low on leverage.

There is enough head room for growth with the

current financial condition of the company.
 The share holdings of the promoters
are set to increase by a huge margin.
Also, Foreign investors have started to
show interest in the company.

Share Holdings Pattern

Latest Share holding pattern
Per the latest filing by the company, the promoters
own around 38.81% in the company and this has
been unchanged for more than 2 years.

However, after the filing two key changes have

happened that impacted the promoters holdings.

Standard Chartered Bank picked up around

7.76% directly from the promoters, thereby
reducing their holdings to 31.05%.

But, it was after this that the amalgamation of

Unnati financial services took place, where around
21 lac shares were allocated to the promoter of
Unnati financial.

We believe that the promoters of Unnati

were same as that of SEIL. Consequently, we
expect the promoters holding in the company
to be more than 60%.

It should also be noted that there can be

indirect holdings in the company through the
30.47% stake owned by the corporate
bodies.
Latest Share holding pattern
Per the latest filing, FII s hold around 5.22 % stake
in the company. Elara Capital Plc is a full service
investment bank headquartered in London.

After the Sep filing, Standard chartered bank has

picked up 9.87% stake in the company in two
transactions.

The first transaction was between Standard

Chartered bank and the promoters and in the next
one, the banks had directly picked up around
2.20% stake in the company from the open
market.

The average cost price was 224 rupees in the

first transaction and 223.13 rupees in the
second one.
 One can invest 75% of their
allocation at the CMP and the rest
25% can be invested at 200 levels or
lower.

Best Buying Price?

 Last 2 years chart

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?

Challenges / Risks involved

Challenges / Risks
The following are the probable risks involved with the investment in this company.

Increase in Competition – The Microfinance sector in India is witnessing increase

in competition almost on a daily basis. There are many local, national and
international players joining the party. Though the sector is supply driven and that
there is huge headroom for growth, increase in competition will become a major
concern going forward.

Geographic Concentration – In spite of SEIL running its business in a very

efficient manner with higher margins, it is due to the fact that its coverage area is
small and hence many of the operational costs naturally tends to be lower.
Currently, SEIL is active only in parts of UP, Rajasthan and Delhi, while most of its
peers have presence in at least 15 states. The company should start diversifying
itself geographically.

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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