HBJ Capital - 10in3 Small Cap Multibagger Stock Reco for Nov'09 - SE Investments Ltd (532900)

8/8/2019 HBJ Capital - 10in3 Small Cap Multibagger Stock Reco for Nov'09 - SE Investments Ltd (532900)

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SE Investments Limited [Code 532900]

HBJ Capital, India

Web:www.hbjcapital.com

Mail: [email protected]: +91 98867 36791

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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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 yourplanned investment]

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


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HBJ Cap is growingfaster than ever.

HBJ Capital can be your50x in 3yearsinvestment.Ask how?

Aim to become #1 -E uit Research

What Next?HBJ Capital Specialists in discovering multibagger stocks is launchingmore & more innovative products & services with single focus on long term

wealth creation!!!

Company in Indiaby 2012, the same

year we haveplanned to get itlisted at BSE/NSE.


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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

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.


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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.

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 andthe 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.

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.


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ContdMicrofinance 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 : [email protected]


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The huge Indian population which was onceseen as a curse of the country is now toutedas 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.

nanc ng e poor anunprivileged


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Financing the unprivilegedIndia 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.


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Welcome to Changing TimesWith 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.


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Birth of MFI Micro finance institutionCRISIL 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.


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MFIs Business model and workingLending Model - In terms of the lending model, MFIs may be classified aslenders 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 weeklyand 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.


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MFIs Business model and working - contdInterest rates - MFIs following the JLG model charge flatinterest 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 solelyengaged in extending microcredit; a few also extend

extensive savings, insurance, pension and remittancefacilities.

Legal Structure -

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.


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Regionally speaking, India is the largestmicrofinance market in the world withmillions and millions of poor households.

Yet, only 2% of MFIs have more than100,000 borrowers and the demand is faroutstripping supply. Is this calledopportunity?

MFIs in India


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Microfinance in India The ScenarioThough 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 isexpected 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.


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Disbursement and Asset QualityDisbursements - At the end of the financial year FY 09, it is estimatedthat 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 expansionin 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%.


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Earnings profile and Geographic concentration

Improvement in earnings profile - Improvement in lending rates andproductivity 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 operatingexpense ratios tend to be lower that less than 5%.

Geographic concentration - Majority of the MFIs, including the largerplayers, 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.


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The company is a NBFC registered with RBIand has its primary focus on Microfinance.The company is one out of the top 10 MFIs inIndia by the total loans outstanding.

SE Investment Limited


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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.


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SE Investments Ltd Snapshot (Nov 22 2009)CMP Rs. 229.80 (The stock price currently holdstremendous value. There is a strong support for the

stock price at 200 levels.)

MCap 120.42 crore (When we started working onthe 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.)

PE 6.48 (There is tremendous scope for PE rerating in

the stock.)

Face Value Rs. 10

Promoters holding 31.05% (With the recentamalgamation, we expect that the promoters holding

will increase to around 60%)

FIIs 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.)

Total # of shares 52.4 lac shares

Liquidity Low to Medium (number of shares tradedEPS Rs. 59.13 (Based on TTM basis. We expect thenet earnings of the company to grow at a CAGR of

50% in the next 3 years.)

52 Week High / Low 144 / 374.75 (The stockmade its life time high of 570 in Sep 2008. However,

the October carnage pulled down the stock price to its

lows.)

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.

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/


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The company operates in three segments Microfinance, Business loans and AlternateEnergy.

Business Verticals


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Business Verticals Alternate energy

Alternate energy - The company has invested Rs16.4 crores (Rs12.6 crores during the 2004-05 financial year andRs3.8 crores during the 2005-06 financial year) in wind energy generation in windmills in Karnataka and Jaisalmer.uring - , a new win energy generator was set up in aisa mer. e tota in ow rom t e sa e o

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 companys revenues. However, there may be an

increase in revenues from this division through the bio waste projects.


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Business Verticals Business Loans

Business Loans This business segment contributed to less than 30% of the revenues in FY 09. However, after theforay 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.


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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 theperformance of the entity

Pricing reflective of the risk assessment of the client

Competitive advantage of fast and efficient decision

Quick processing

Robust reminder and collection process

Growth fuelled by Inter corporate deposits -


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Business Verticals Microfinance

Microfinance The company forayed into the Microfinance division in the year 2006 and since then the companyhas 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 theyears 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.


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ClientsSEIL 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.


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Microfinance with a difference


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Since the company is a NBFC fromMicrofinance segment, it becomes pivotalto understand about the various loanproducts, how funds are mobilized, thestaff productivity and the quality of the

portfolio.

Insights into the operations


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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.


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Portfolio Statistics

In the last five years of operation leading to Mar 2008, SEILs 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.

i i i i i


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Fund mobilization Deposits and EquityThe access to funds is one of the key driving force behind the companys 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 fromcompanies. 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 ofinter 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 foroperations. 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.

d bili i B k


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Fund mobilization Bank LoansAs 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.

S ff P d i i


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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.

C di P f d P f li Q li


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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.


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There is nothing as perfect in the world ofinvestment. Each and every investment option

would carry both positives and negatives factorswhich would affect the company in the years tocome.

It is here that we make sure that the positive factorshave a overwhelming impact on the company.

Defining Factors

D fi i F t D d S l i t h


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Defining Factors Demand Supply mismatchWith 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 fromthe 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 Rs65,000 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.

F i t Mi h i t


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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 than90% of Indias 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.

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. Themicro 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 amalgamationof 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 around300,000 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 ti


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PE re-ratingCurrently, 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 marketcap 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 fromthe new entity and since that foreign investors came in prior to the

amalgamation, we will base our PE rerating views on the companynumbers 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 shouldbe 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 ti F i I t t


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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 readersto avoid it. One of the foremost reasons for our call, has been that in spite of business looking good, thecompany 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 equitymoney that came into India in the last 1.5 years, SEIL was not able to attract even a single rupee. This negative factor indeed

ea us to e eve t at somet ng may e wrong w t t e company n sp te o t e very goo va uat ons an t e uge va ue

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 havepicked 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 ti Li ti f P


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PE re-rating Listing of PeersOne of the foremost reasons as to why SEILs valuations are lower is that thecompany 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 companynamed 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. Webelieve 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 moneystarted 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 timesthe 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. Thekind 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 beenpublishing audited financial results and their balance sheets.

A lg ti f U ti Fi i l S i


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Amalgamation of Unnati Financial ServicesAfter 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 Unnatis 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 topromote biogas and bio fertilizer business across its operational area thus

generating employment and micro credit simultaneously serving the

energy needs of the client households.


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A smaller company like SEIL has scored well incomparison to its peers on many operationalparameters.

Peer Comparison

Peer Comparison


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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

, . t s very ev ent rom t e a ove compar son t at can ru s ou ers w t many o ts arger s ze peers onvarious 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 toconcentrate on geographic expansion and leveraging its networth.


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The companys balance sheet suggests that it isconservative in nature. Also, SEIL has a goodheadroom to leverage itself.

Financial Analysis

Profit and Loss Statement Yearly


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Profit and Loss Statement - YearlyBoth 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 forFY 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


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Profit and Loss Statement - QuarterlyThe 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


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Balance SheetThe 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 andthe 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 haveincreased 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.


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The share holdings of the promotersare set to increase by a huge margin.Also, Foreign investors have started toshow interest in the company.

Latest Share holding pattern


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Latest Share holding patternPer 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 havehappened 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 ofUnnati financial services took place, where around

21 lac shares were allocated to the promoter of

Unnati financial.

We believe that the promoters of Unnatiwere same as that of SEIL. Consequently, weexpect the promoters holding in the company

to be more than 60%.

It should also be noted that there can beindirect holdings in the company through the30.47% stake owned by the corporatebodies.

Latest Share holding pattern


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Latest Share holding patternPer 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 haspicked 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 openmarket.

The average cost price was 224 rupees in thefirst transaction and 223.13 rupees in thesecond one.


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One can invest 75% of theirallocation at the CMP and the rest25% can be invested at 200 levels orlower.

Last 2 years chart


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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-Sept09 it was trading below 100 DMA but after some bulk deals and you can see increased volume in

Sept09, 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


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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 orlower.

Any investment for capital


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Any investment for capitalappreciation carries an associated risk

with it. What are the risks that couldderail the growth prospects for thiscompany?

Challenges / Risks


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

Increase in Competition The Microfinance sector in India is witnessing increasein competition almost on a daily basis. There are many local, national and

international players joining the party. Though the sector is supply driven and thatthere 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 veryefficient 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 itspeers have presence in at least 15 states. The company should start diversifying

itself geographically.

Access to fundsSEIL, like any other MFI will face funding pressure to keep upthe 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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DisclaimerThis document is not for public distribution and has beenfurnished to you solely for your information and mustnot be reproduced or redistributed to any otherperson. Persons into whose possession this documentmay come are required to observe these restrictions.

This material is for the personal information of theauthorized recipient only.

The recommendation made herein does not constitute anoffer to sell or solicitation to buy any of the securitiesmentioned. No representation can be made thatrecommendation contained herein will be profitableor that they will not result in loss. Informationobtained is deemed to be reliable but do notguarantee ts accuracy an comp eteness. ea ers us ngthe information contained herein are solely responsiblefor their action.

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