SKS Microfinance swung to a fourth quarter net loss and its shares plummeted after JP Morgan slashed its price target on ballooning provisions at India's biggest microlender and worries over its business model.
The country's once thriving microfinance sector has been reeling, since the state of Andhra Pradesh last year clamped down on loan recovery practices blamed for a slew of suicides by borowers.
Loans as low as 2,000 rupees ($44) are used by the poor for ventures such as buying livestock or opening a tea stall. Some spend the cash on consumer goods or to send their children to school.
SKS on Friday posted a net loss of 697.7 million rupees ($15.57 million) in the fourth quarter, compared with a profit of 628.9 million a year earlier. Net sales sank to 1.88 billion rupees from 3 billion.
SKS, India's only listed microfinance company which surged to prominence when it raised $358 million in an initial public offering in August, posted provisions and write-offs of 1.06 billion rupees, compared with 148 million a year earlier.
"We think the Andhra Pradesh portfolio is seeing more losses and the business model has weakened elsewhere too," JPMorgan analysts wrote in a report released before the results. "We fear that SKS may need more capital," the report said.
Andhra Pradesh was SKS's biggest market in the largely unregulated microfinance sector. Shares in SKS, which the market values at $674 million, fell 20% to a record low of 330.75 rupees, after JPMorgan slashed the stock target price to 200 rupees from 550.
The stock closed at 331.80 rupees, down 19.7%, in Friday trade, in a Mumbai market that rose 1.7%. The stock is down 77.8% from its all time high touched in September, following its IPO.
Expected loss of billions
JPMorgan said it expected SKS to post a loss of 7 billion rupees this fiscal year due to write offs related to its Andhra Pradesh business, compared with an estimated profit of 1.7 billion rupees profit in the last fiscal year.
"It gives the markets the jitters," said Arun Kejriwal, a strategist with research firm KRIS. "Virtually half their (SKS) business has stopped. No loan recoveries for a while so large provisions are expected this time."
The central bank on Tuesday announced an interest rate cap of 26% on micro loans of up to 50,000 rupees, two %age points higher than an advisory panel recommended.
JP Morgan said it expected SKS's collection rate from Andhra Pradesh to be 25% this fiscal year, adding that the write-downs of bad loans could stress the company's liquidity. "Our channel checks with some NGOs indicate lower collection rates at 10 % in AP and with no fresh disbursements, we believe collections rate could negatively surprise," it said.
JPMorgan analysts also said they expected credit charges to inch up in other states, and collection to dip in states like West Bengal.