- 1. SE Investments Limited [Code 532900]The company is a NBFC
registered with RBI and has its primary focus on Microfinance. It
is one out ofthe top 10 MFIs in India by the total loans
outstanding. Recently two of the most reputed FIIs UKBased
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
anattractive valuation. HBJ Capital, India Web: www.hbjcapital.com
Mail: [email protected] Call: +91 98867 36791
2. Best Buying Price2 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!!! 3. HBJ Cap is growingfaster
than ever. HBJ Capital can be your50x in 3yearsinvestment. Ask how?
Aim to become #1 - Equity Research Company in Indiaby 2012, the
sameyear we haveplanned to get it listed at BSE/NSE.What Next?HBJ
Capital Specialists in discovering multibagger stocks is
launchingmore & more innovative products & services with
single focus on long term wealth creation!!! 4. 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. 5. From the desk of CEO, HBJ Capital Dear
Investors,Microfinance as a sector has How many times we have
cribbed the banks for asking us too manybeen growing at very
impressive documents while applying for any loan? How many times we
feelgrowth rates. The sector iscompletely supply driven and
irritated going back to the banks again and again to get the
closurethe demand is far outstripping and the approval for the loan
that we had applied. But, never the supply. Considering that
themind, the truth remains that we are all highly privileged
people.sector as such grows at a very high CAGR of 50%, it would
take at least 7 years to fulfill theConsider the fact that there
are millions and millions of householdscurrent demand. SEIL is the
7thin India, to be more precise more than 150 million
householdslargest MFI in India. It is good with absolutely no
access to credit. These are people who arethat I will invest, just
after the FII extorted by local money lenders who get at least 36%
interest PA.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. 6. ContdMicrofinance is the
hotspot of private equity deals. Can you believe that more than 40%
of the private equitymoney that came into India in the last 18
months went into the Microfinance sector? But the truth remains
that, inspite of huge money flows into the sector, the sector is
able to address only 10% of the total demand in thecountry.The
total demand for microfinance is currently estimated at around 60
billion USD, out of which not even 6 billionUSD is addressed. In
such a high growth sector, we are happy that we have found a very
good investment avenuefor our subscribers.The 10in3 pick for this
month is SE Investments Ltd. One can invest 75% of their allocation
at the CMPand 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 marketsare all about
perceptions and perceptions do change. Our perceptions on SEIL have
changed dramatically and wehave 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
sayundiscovered, 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 andnow, we wish you would also be
part of the story.Kumar Harendra, CEO, HBJ
Capital,www.hbjcapital.com5th Main, Girinagar, BSK 3rd Stage,
Bangalore 85; Call : 098867 36791 or Mail : [email protected] 7.
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 nowtouted as the biggest financing
opportunity.Financing the poor and unprivileged 8. 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. 9. Welcome to Changing TimesWith the recommendations in
place, commercial banks were enabled tomove into rural areas,
albeit the advances given to the poor remained low.To improve
accessibility of the existing banking network to the poor, theSelf
Help Group (SHG)-Bank Linkage Model was launched in 1992
tofacilitate empowerment of the poor, while pursuing the macro
economicobjective of overall economic growth.Currently, a range of
institutions in both the public sector and privatesector offer
micro-finance services in India. Such institutions are
broadlycategorized into two categories, namely: formal institutions
and informalinstitutions.The former category comprises of Apex
Development Financial Institutions,Commercial Banks, Regional Rural
Banks, and Cooperative Banks thatprovide micro-finance services in
addition to their generalbanking activities.The informal
institutions that undertake micro-finance services as their
mainactivity being referred to as Micro - Finance Institutions
(MFIs). Whilst bothprivate and public ownership can be found in the
case of formal financialinstitutions offering micro-finance
services, the MFIs are mainly found in theprivate sector. 10. 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. 11. 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 adoptthe group-based lending models, which are
of two types - the self - helpgroup (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, eachmember of the group.The most popular JLG
model is the Grameen Bank model. However, mostof the large MFIs in
India following a hybrid of the group models.The model of lending
to individuals is similar to the retail loan financingmodel of
banks. In this model, the MFIs usually lend to highly creditworthy
individuals who have shown their repayment ability through
loansalready.Loan repayment - Most MFIs following the JLG model
adopt the weeklyand fortnightly repayment structure.Those under the
SHG model have a monthly repayment structure. MFIslending to
traders in market places also offer daily repayment, while
MFISextending agricultural loans have bullet and cash flow based
repaymentstructure depending on the crop patterns. 12. MFIs
Business model and working - contdLegal Structure - Interest rates
- MFIs following the JLG model charge flatinterest rates of 12 to
18 percent on their loans, while theMFI s following the SHG model
charge 18 to 24 percent asinterest on a PA basis and reducing
balance method.Some of the MFIs also charge a processing fee
comprisinga certain proportion of the loan amount sanctioned at
thetime of disbursement.Product offerings - Most of the MFIs in
India are solelyengaged in extending microcredit; a few also
extendextensive savings, insurance, pension and
remittancefacilities.MFIs offer savings services in two ways - the
savings areeither collected by the MFI or the SHG. In the
lattermethod, the MFI or NGO encourages the SHG to collectsavings
from each member of the group.AN MFI collecting savings from
borrowers may eithermake it compulsory for borrowers to have
savings with it. 13. 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 14. 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 governments initiatives to achieve greater financial
inclusion and growth in the countrys 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. 15. 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%.
16. 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. 17. 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 18. 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 waspromoted as a private limited company under
the Companies Act, 1956,on 05th March, 1992.On 01.03.1995, fresh
certificate of incorporation, consequent uponconversion to Public
Limited Company was granted by the office of theRegistrar of the
Companies, Uttar Pradesh, Kanpur.The company has business interests
in microfinance, financial services andAlternate energy. However,
the current focus and the road ahead for thecompany is based on the
Micro finance division.The company which forayed into the
Microfinance division in the year2006 has a proven track record and
is counted as one of the top 10Microfinance companies in India,
based on the total Loan amountoutstanding at the end of financial
year FY 09.The company has been successful in its microfinance
division and it canbe attributed to the fact that the company has
been engaged inproviding financial services and lending products
since 1992.The microfinance operations of the company is
concentrated in parts ofUttar Pradesh, Delhi, Gujarat and
Rajasthan. 19. SE Investments Ltd Snapshot (Nov 22 2009)CMP Rs.
229.80 (The stock price currently holdsFace Value Rs. 10tremendous
value. There is a strong support for thestock price at 200
levels.)Promoters holding 31.05% (With the recent amalgamation, we
expect that the promoters holdingMCap 120.42 crore (When we started
working onwill increase to around 60%)the report, the stock was
commanding a market cap of70 crore. It was only then the
amalgamation of UnnatiFIIs holding 15.09% (Two of the most reputed
FII s financial happened, increasing the market cap. WeElara Plc
and Standard Chartered Bank have picked upexpect increased earnings
due to this amalgamation.) stakes in the company very recently.)PE
6.48 (There is tremendous scope for PE rerating inTotal # of shares
52.4 lac sharesthe stock.) Liquidity Low to Medium (number of
shares tradedEPS Rs. 59.13 (Based on TTM basis. We expect the
usually ranges between few 1000s to 10K shares. Thenet earnings of
the company to grow at a CAGR of stock has also shown volumes in
excess of 10K on many50% in the next 3 years.)days. However, many
times, the volumes tend to be lesser than 1000 also)52 Week High /
Low 144 / 374.75 (The stockmade its life time high of 570 in Sep
2008. However, Website: http://www.seil.in/the October carnage
pulled down the stock price to itslows.)The calculation of PE based
on EPS and net earnings willnot lead to the same market cap, since
the EPS for thelast 4 quarters does not reflect the amalgamation
yet. 20. The company operates in three segments Microfinance,
Business loans and AlternateEnergy.Business Verticals 21. Business
Verticals Alternate energyAlternate 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.During FY
2005-2006, a new wind energy generator was set up in Jaisalmer. The
total inflow from the sale ofenergy 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.
Theseplants will utilize the bio waste generated in the clients
agricultural lands (crop wastes) and the bio wastecreated by the
cattle.However, it should be noted that the company forayed into
the alternate energy division prior to the foray intomicrofinance
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 thefinancial year
FY 09, this division contributed to less than 5% of the companys
revenues. However, there may be anincrease in revenues from this
division through the bio waste projects. 22. Business Verticals
Business LoansBusiness 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 segmentcontributed 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 thisdivision is usually
between 16% and 33%. This business division continues to be a
strong contributor for the highmargins for the company.Due to the
higher loan amount size (greater than 20K and 1 lac), this is not
categorized under the microfinancedivision. However, most of the
clients here have the same profile as the microfinance customer.
23. Business Verticals Business Loans (contd) Focus on a large
clientele of small businesses, family runenterprises and traders
Transactions are based on qualitative and quantitativeassessments
Focus on credit history, local knowledge of theoperating segment
and an understanding of theperformance of the entity Pricing
reflective of the risk assessment of the client Competitive
advantage of fast and efficient decisionmaking Quick processing
Robust reminder and collection processGrowth fuelled by Inter
corporate deposits - 24. Business Verticals
MicrofinanceMicrofinance 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 neat50% 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 thestrong 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% jumpover the
previous year. 25. ClientsSEIL has witnessed strong growth rates in
the number of clients. The company ispart of the just 2% of the
MFIs with more than 100,000 clients.The company envisages on
supporting 400,000 households through variousmicrofinance schemes
by the end of 2010. 26. Microfinance with a difference 27. 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 28. Various financial
productsThe Microfinance loan products are the largest contributors
with around 65% of the revenues in FY 09, followedby Business loans
at just less than 30% of revenues and Personal loans along with the
alternate energy divisioncontributing 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 stronggrowth in
the revenues.The interest rates for microfinance loans are believed
to have gone up from 14% to 16% in the recent months. 29. Portfolio
StatisticsIn the last five years of operation leading to Mar 2008,
SEILs portfolio (including securitized portfolio) has grown10 times
at a CAGR of 77% PA from Rs19.7 crore on March 2004 to Rs192.8
crores as on 31 March 2008 and toaround 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 March2008. This is
because of the increased proportion of microfinance loans in the
overall portfolio. 30. Fund mobilization Deposits and EquityThe
access to funds is one of the key driving force behind the companys
growthrates and its success. Hence, it becomes pivotal to
understand how the funds aremobilized.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) atthe end of the financial year FY 09 was
Rs43.0 crores.The contribution of public deposits on the total
deposits have decreased from87.3% on March 2005 to around 25% on
March 2009 while the proportion ofinter corporate deposits have
increased from 12.7% in March 2005 to around75% 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 raisefunds.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 CumulativeRedeemable
Preference Shares of Rs. 10/- each at a premium of Rs.90/- per
share after taking the approval ofmembers in their Extra-Ordinary
General Meeting held on 29 December 2008. By this issue, the
Company hasraised the funds for an aggregate amount of Rs.25 Crores
for its growth objectives. The company has also beenissuing equity
shares to foreign investors to raise money. 31. Fund mobilization
Bank LoansAs on 31 03 - 2009Banks as part of their obligations
towards priority sector and as laid out by RBI, have to provide at
least 40% of theirtotal lending portfolio to priority sectors such
as Agriculture, Exports, Rural and the Poor. In order to meet
theobligations, most of the banks lend to the MFIs which in turn
provide microfinance to the poor, rural and agrihouseholds.SEIL had
borrowed funds from diversified sources. The total outstanding
borrowings had increased from Rs57.9Crores 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 SEILthrough Term loans. 32. Staff ProductivityThe 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. 33. Credit Performance and
Portfolio QualitySEIL has good portfolio quality with an overall
repayment rate of 97.9%. PAR (> 60 days) was 1.6% ason 31 March
2008 against 2.4% on March 2007. The ratio of total overdues to the
total loan outstanding was0.9% as on 31 March 2008.The figures in
the above table suggest that the organization has good recovery
mechanisms, which enables it torecover most of the overdues within
30 days. 34. There is nothing as perfect in the world ofinvestment.
Each and every investment optionwould 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 35. Defining
Factors Demand Supply mismatchWith a 3 year time frame, we believe
that the following would stronglyimpact the company and define its
growth. These factors will also be thekey 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 thecountry is 60 billion
USD.This assumption takes into account that there are 150 million
poorhouseholds in India, with an average credit demand of 20,000
rupees.However, the supply from the sector is just 10% of the
demand and thedemand outstrips supply by a large extent.We believe
that the demand will continue to rule higher than the supplyfor
many more years to come, thus paving the way for a strong growth
ofthe MFIs involved.It is estimated that the number of borrowers is
estimated to touch 35million in March 2011 as against 21 million in
March 2009. Resources willbe 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
likeSEIL record very strong growth rates at least for the next 3
years. 36. Foray into Micro housing segmentSimilar 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 spaceis hugely untapped, with demand
outstripping supply by even larger extent. It is also true that the
supply is veryless or negligible.SEIL has forayed into the Micro
housing segment where it will provide financial support to total
areas of about 300 to 350square 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
themicro 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
ofthis pyramid. 37. PE re-ratingCurrently, the market cap of the
company is 120 crore, with around 52.4 lacshares of Rs.10 each. The
company witnessed an increase in the market cap andthe 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 avaluation of just 3.88 on net earnings of around
18.57 crore. However, afterthe 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 theamalgamation, 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 thebottom line
will be visible only from the current quarter. However, the
presenceof 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 andpromises value.Also, our expected ramp up in net
earnings due to the amalgamations mayreduce the valuations of SEIL
to the older levels. (at the CMP) 38. PE re-rating Foreign
InvestmentsMany 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 indeedlead us to believe that something
may be wrong with the company in spite of the very good valuations
and the huge valuethat the stock had.However, our questions were
answered and SEIL has attracted foreign investments. Its just that
we were very early inindentifying 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%. Itis
to be noted that Standard Chartered Bank in spite of picking up
7.67% from the promoters, it was not happy that it wenton 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 avery good ramp up in valuations. 39. 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 haveincreased
the premium for the company, that has not been the case, since
there weremany other MFIs operating that were not part of the
exchanges. While that has beenthe 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 whenMicrofinance 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 allthe 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 constantincrease and it
has achieved a stage where in the investors absolutely do not
findvalue 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 thecompanies in this sector in
the recent months.Many MFI s may list soon - Not only the industry
leader - SKS Microfinance, butmany of the other for-profit MFIs
have received private equity investments. Thekind of growth that
the companies are witnessing and the huge capital pressurecoupled
with PE players asking for exit routes may result in a slew of
listings fromthis 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.
40. 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 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 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. 41. A smaller
company like SEIL has scored well incomparison to its peers on many
operationalparameters.Peer Comparison 42. Peer ComparisonSEIL is
the 7th largest MFI in India (excluding SKDRDP which is a trust)
based on the Loan amount outstanding as on Mar31,2009. It is very
evident from the above comparison that SEIL can rub shoulders with
many of its larger sized peers onvarious parameters. For Ex SKS
with around 3900 crore of disbursements, 17 times that of SEIL, has
managed to makerevenues 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 concentratedwhen 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 needsimprovements.The customer base of SEIL is
very low when compared to its peers. Also, the company, being
conservative does not leverageitself 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.
43. The companys balance sheet suggests that it is conservative in
nature. Also, SEIL has a good headroom to leverage itself.Financial
Analysis 44. 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%. 45. Profit and Loss
Statement - QuarterlyThe company has been witnessing stronggrowth
rates in the last 2 quarters due tothe infusion of fresh capital
into thecompany.For the last 2 quarters, the company hasreported
net earnings growth of morethan 75% on a more than 50% increasein
sales.Also, the key efficiency ratios are on aconstant upward move.
46. 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. 47. 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 48. Latest Share holding patternPer
the latest filing by the company, the promotersown around 38.81% in
the company and this hasbeen unchanged for more than 2
years.However, after the filing two key changes havehappened that
impacted the promoters holdings.Standard Chartered Bank picked up
around7.76% directly from the promoters, therebyreducing their
holdings to 31.05%.But, it was after this that the amalgamation
ofUnnati financial services took place, where around21 lac shares
were allocated to the promoter ofUnnati financial.We believe that
the promoters of Unnatiwere same as that of SEIL. Consequently,
weexpect the promoters holding in the companyto 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. 49.
Latest Share holding patternPer the latest filing, FII s hold
around 5.22 % stakein the company. Elara Capital Plc is a full
serviceinvestment bank headquartered in London.After the Sep
filing, Standard chartered bank haspicked up 9.87% stake in the
company in twotransactions.The first transaction was between
StandardChartered bank and the promoters and in the nextone, the
banks had directly picked up around2.20% stake in the company from
the openmarket.The average cost price was 224 rupees in thefirst
transaction and 223.13 rupees in thesecond one. 50. 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? 51. Last 2 years
chartDuring last two years, stock has made its life time high of
570 in Sep 2008. However, the October carnage pulleddown 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 inSept09,
the stocks price is well above 100 DMA. There is strong support at
200 levels & it can find resistance above300. 52. Last 6 months
chartAt 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. 53. Any investment for capitalappreciation carries
an associated riskwith it. What are the risks that couldderail the
growth prospects for thiscompany?Challenges / Risks involved 54.
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
andinternational players joining the party. Though the sector is
supply driven and thatthere is huge headroom for growth, increase
in competition will become a majorconcern 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 issmall 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
diversifyingitself geographically.Access to funds SEIL, 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
areavailable at a reasonable cost. Currently, SEIL is unable to
garner funds at lowercosts, when compared to its larger peers.
Though there will be increase in fundingfrom banks, the demand will
only be much larger going forward. 55. To know more about HBJ
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