M&M Financial our top pick in NBFC space: Santosh Singh, Espirito Santo

In an interview with ET Now, Santosh Singh, CFA, Espirito Santo, shares his views on SKS Micro’s Q1 numbers and some sectors. Excerpts:
ET Now: It is just the beginning of the conviction that you had in the stock. 6% or 7% up in trade. Were you enthused by the numbers? They have largely done this for the last couple of quarters. What did you make of the numbers?

Santosh Singh: Clearly there were two-three concerns on SKS. The first and foremost concern was that whether they will be able to come out of the Andhra crisis and will be able to post profit. The second concern was whether they will be able to create the sort of credit environment which it was earlier, sort of credit efficiencies, and the third one was that whether they will be able to get that operating leverage. Now if I look at all these three points, what is getting quite clear is that the credit behaviour is as it was. Credit behaviour is not deteriorating and they are still at 99.9% sort of collection efficiency. Second one is that whether this business model is scalable. Clearly they are showing that it can be grown, it has been growing and they are assuring that it can be grown and they are talking about around 40% to 50% sort of growth in the loan book in this particular year. Finally operating leverage is pretty much to be seen by the market. In the last quarter except for the exceptional items if I look at last quarter and this quarter on the similar loan book, the profit is up around 14 to 15 crore. Now that is pretty huge in terms of operating leverage. Actually our conviction was pretty high when we saw this company coming out from the Andhra crisis. The way they came out despite reducing the loan book by say around 50-60%, their collection efficiency was in excess of 95% across Indian except Andhra Pradesh. So that clearly showed that there is strength in the business model and it is not just about evergreening. So yes, our conviction is getting higher on this particular stock.

ET Now: Just wondering given that the recent RBI measures have made the funding environment tougher for companies, it will become even tougher for companies like SKS. Do not think is that a bit of lingering concern or not really?

Santosh Singh: Not really because I am looking at the NBFC space. I there is any PSL available, that is microfinance, so clearly from the PSL point of view, this is a very lucrative sector, that is no. 1. Secondly, the amount of funding we are talking about for the microfinance sector, it is hardly anything. Actually the amount of additional funding which is required for SKS for this particular year will not be more than Rs 600 to 700 crore. Finally on the rate side, if I am looking at any sector which can actually pass on the rates and which is not rate sensitive because, it will not be rate sensitive on the upside as well as downside in my opinion going forward because clearly they have a margin cap, they have a cap on the margin, they cannot make more than 10% margins. Now that is a cap where if the interest rates move up, they will have to pass on to the customers or if the interest rates move down, again they will have to pass on to the customers. So clearly this is one sector which is not actually that much impacted by any sort of increase or reduction in rates.

ET Now: What about some of those key regulatory changes that have come up in? Do you think that the macro environment for some of the other NBFCs also is likely to worsen? Are you going to see pressure on some of the other names, barring an SKS?

Santosh Singh: Definitely. If it is a long-term measure. Definitely we are going to see a lot of pressure because clearly the market environment is not such wherein you can pass on cost to the customers have survived without any increase in NPLs and if this is sort of a long term measure we will be talking about 70 to 75 bps increase in rates across the board. If that is going to happen, then either we are going see reduction in growth or we are going to see increase in NPLs. So clearly it depends on if it is a short-term measure or a long-term measure. If it is short term, it is hardly going to impact, but if it is long term, it is going to impact everyone quite badly.