SKS' fall at the stock markets shows the company needs resources

In August last year when SKS Microfinance became the first microfinance company in the country to list on a stock exchange and see its initial public offer, or IPO, subscribed several times over, few would have thought that 15 months later it would post record losses. To make matters worse, the results came with a note that says: "Since the company has no profits, it would require an approval of the central government for payment of remuneration in excess of the said limit."

The obvious reason for the huge losses - Rs 384.54 crore compared to Rs 80.54 crore net profit in the corresponding quarter of the previous year - is the provisioning and write-offs to the tune of Rs 353.35 crore, apparently on account of its portfolio in Andhra Pradesh, where both collections and loan disbursements have almost come to a halt after the clampdown by the state government.  

However, compare the results of the last two quarters and it is clear that expenditure in the latest one, which ended September 30, is more than the income whereas the income and expenditure were almost equal in the previous one. This excludes the provisions and write-offs. The expenditure in the latest quarter is more than the income by as much as Rs 31 crore. Those who have been tracking the company see the explanation in a combination of factors.  

One could be operational losses, an obvious outcome of the drying up of lending while operational costs have remained largely unchanged - the company's 19,000 employees across 19 states remain intact.  

The second factor could be what is called "de-recognised interest", which gets reflected in reduced income. If you give out a loan on which you are to earn interest, whether the borrower is paying back or not, you are supposed to show it in your books as income. However, after 180 days if the borrower is not paying interest, the interest component shown as income so far is reversed.

Whatever the reasons, the results clearly show that the company needs resources. It's not a surprise, then, that it is keen on a qualified institutional placement, or QIP, of up to Rs 900 crore. QIP is an offer of stocks to sophisticated foreign institutional investors, under Securities & Exchange Board of India's pricing guidelines, who get a stake in the company. However, with SKS reporting the losses, it interest among those investors cannot be taken for granted. Those from the sector say it is quite likely that some of the investors may have invested in the company earlier at a high price and may want to buy the stock now to lower their average purchase price.

So, what is the path ahead for the company? Not very rosy. Says S Viswanatha Prasad, Co-founder, Bellwether Microfinance Fund: "It is clearly a distress situation and even if they do their best to come back, it will take at least a couple of years of hard work." It is perhaps with good reason that SKS executives are neither available for comment.