SKS Microfinance kicks off $347 million Indian IPO

It has started well for SKS Microfinance, a provider of small-scale loans to individuals from poor segments of rural India, in its quest to become the country's first publicly listed microfinance institution.

Yesterday, it finalised the sale of 18% of its initial public offering to a group of around 20 anchor investors at the top end of the indicated price range. If other investors are willing to pay as much, the company could raise a total of Rs16.54 billion ($347 million) from the IPO, making it the second largest listing in India this year after Jaypee Infratech's $511 million listing in early May.

The formal bookbuild for SKS Microfinance's IPO opens today with the shares being offered in a range between Rs850 and Rs985. Qualified institutional buyers (QIBs) have three days to subscribe, while the offer will stay open for one extra day (until Monday) for retail investors and high-net-worth individuals.

The fact that the anchor investors were happy to pay the maximum Rs985 per share shows that the concept of microfinance is gaining acceptance as a profitable investment opportunity and that it has indeed come a long way since Muhammad Yunus set up Grameen Bank in 1983 and began to provide tiny loans to poor people in Bangladesh. However, the idea remains the same -- to help poor people get a business started from which they can earn a living and lift themselves out of poverty.

The ultimate evidence that microfinance appeals to more than just the poor came in the lead up to the IPO when George Soros's Quantum Fund bought 300,000 shares in the company from an existing shareholder at a price of Rs636 per share. Quantum also bought 8.85% of the anchor tranche, which should give the fund a combined stake of 1.6% in the company after the IPO.  

The anchor tranche also includes a number of other high-profile investors and funds, which should help boost interest from other parties. Indeed, sources say the indication is that, contrary to the government sell-downs early in the year, this offering could prove popular with retail investors as well. Among the top anchor names, some which are investing through several funds on behalf of clients, are Abu Dhabi Investment Authority (Adia), JP Morgan, Morgan Stanley, Birla Sun Life, Sundaram BNP Paribas, ICICI Prudential Life Insurance Company and Reliance Capital.

SKS Microfinance too started life as a charity with a not-for-profit business model back in 1993, but in 2003 was converted into an incorporated private limited company and in 2005 it was registered as a non-deposit-taking non-banking finance company. Today it is the largest microfinance institution in India both in terms of the value of outstanding loans, the number of borrowers (called members) and the number of branches.

The fact that it now has a parallel target of making a profit for its shareholders hasn't changed the ultimate aim of the business, however. According to the prospectus, its mission is still as ambitious -- to eradicate poverty. Its core business is to provide small loans to poor women who have very limited or no access to loans from other sources other than private money lenders, who charge very high rates of interest.

The IPO will allow SKS Microfinance to further diversify its source of funding and enable it to expand its geographic coverage and the number of people it lends to. But it will also allow some of the group's early investors to exit or monetise part of their investments.

According to a 2008 report by independent industry research firm Intellecap entitled "Inverting the Pyramid", the total demand for microfinance in India is just over $50 billion. At the time the value of outstanding loans was $4.3 billion, or just under 9% of the need, suggesting huge growth potential.

Indeed, SKS Microfinance has grown massively in the past four years as it has been tapping into this market with the number of borrowers increasing from approximately 202,000 in five states in fiscal 2006 to 6.7 million in 19 states in fiscal 2010, which ended in March this year. Its number of branches has ballooned to more than 2,000 from 80 and the value of its loans outstanding has grown at a compound annual growth rate of 147.7% to Rs29.4 billion ($629 million) from Rs780.5 million.

Meanwhile, its net profit has expanded at a CAGR of 221% in the same period to Rs1.7 billion in fiscal 2010, based on a revenue of Rs9.6 billion.

The profits come partly from the interest rates that it charges, which are significantly higher than bank lending rates. However, these small-scale loans - the average is typically no more than Rs12,000 to Rs15,000 ($257-321) and the maximum just Rs50,000 -- are clearly a lot riskier than your average unsecured bank loan. But for the borrower, the key thing is access and as banks don't typically provide loans this small and the money lenders at the other end of the scale that would be alternative can charge as much as 100%-150%.

Analysts at research firm Execution Noble say that the yield on advances has ranged from 25% to 30% for SKS Microfinance over the past three years, but note that this may come under pressure going forward as more are players entering the market.

The company is offering 16.792 million shares, of which 44.3% are new and 55.7% will be sold by existing shareholders. Of the total, 60% will be offered to QIBs, including the anchor investors, 30% to retail investors and 10% to non-institutional investors, primarily high-net-worth individuals.

The price range values the company at approximately 3.4 to 3.8 times its estimated post-money book value for the fiscal year to March 2011.

Citi, Credit Suisse and Kotak Mahindra are the bookrunning lead managers.