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3 Lessons from the Rise and Fall of SKS Microfinance

“A Microlending Star Moves On” read a headline in today’s issue of The Wall Street Journal.

The report talked about the resignation of Vikram Akula, one of the best-known figures in microfinance, from the company he founded – SKS Microfinance.

Akula founded SKS in 1998 and guided it to a stock-market listing in August last year that raised Rs 16.5 billion.

As per the latest available data, SKS has 7.7 million clients in over 2,400 branches in 19 states across India (with a large proportion coming from Andhra Pradesh). SKS charges an annual effective interest rate between 26% and 31% for core loan products.

Well, those were some data points about the business of the company. Talking about the stock’s performance since its listing, here is a chart that bares it all.

Source: Ace Equity, Safal Niveshak Research

If you had invested Rs 100 in SKS when the shares were listed in August 2010, you would be ruing at your decision. This is given that your investment of Rs 100 would’ve stood 89% down, or at just Rs 11 currently.

So much for the hype that surrounded the IPO last year, which was oversubscribed 13.6 times!

The successful IPO was indeed seen as a landmark, given the novelty of SKS’s business – it was the first micro-lender in India to get listed and was thought of as the torch bearer for other such lenders.

Anyways, as they say, the rest is history. But then, history is a good teacher.

There are some lessons that investors can learn from the rise and fall of SKS – the business and the stock.

Here are 3 that I believe will come in handy for you in the future.

1. New isn’t always good
We humans are almost always excited by change. Anything that’s ‘new’ is always a cause of amazement, even if it’s temporary.

This is also true when it comes to businesses. New businesses attract us as investors, and we are willing to pay any price to get a share of the same.

The bigger the dream that is shown to us, the more we believe in the same. Think Reliance Power or any other failed IPO here (and they are in plenty).

Small investors were lured to invest in businesses that did not earn a rupee in profit. And they were lured by hopes of huge future profits.

“SKS is a novel business idea, so I think I can make a lot of money investing in it!” This was a general thought among several investors I’d met before the company’s IPO in 2010.

You see, in investing, new isn’t always good. In fact, new is risky, as it has been proven in the SKS case.

You must never invest in companies that don’t have a few years of good performance to show for. After all, you don’t have the appetite of a venture capitalist or a private equity investor.

You are a small investor, who can’t afford to risk his hard-earned savings into ‘new’ businesses that don’t have a past.

Like in the advertisement of a leading Indian car brand, always ask this before applying to any IPO – “Kitna deti hai?” (What’s the mileage?)

2. Know the downside better than the upside
IPOs of high profile companies always draw a significant amount of investor interest.

Like it did for DLF, and Reliance Power, the story repeated for SKS.

Interestingly, when the euphoria is high, nobody questions the downside – the risks that can lead to a sad ending for the story.

Nobody questions whether the business is really sustainable, or whether the promises that the Chairman made during IPO launch, are achievable.

Take SKS here. Akula promised the moon when he went on his road trip asking people to apply to the IPO. He portrayed SKS as the torchbearer for the upliftment of the Indian poor.

All he talked about then was high future growth and profitability. The master plan to achieve that was never shared.

Anyways, just a few months after the successful IPO, SKS was hit by a series of setbacks. There were reports of suicides of microfinance borrowers in rural Andhra Pradesh, and SKS featured prominently in them, along with other companies.

Then, there was the unceremonious sacking of CEO Suresh Gurumani that raised a number of eyebrows regarding the problems brewing inside the company.

All these problems have shown in the company’s financial performance, which has gone downhill over the past few quarters.

Source: Ace Equity, Safal Niveshak Research

The company is currently deep into losses, and given the nature of problems it is facing, there seems to be no way things can turn up for the better in the future.

If you are holding onto the stock expecting to get back your capital, I’m sorry to say but things look very bleak out there.

This is what I call the real risk of investing in stock markets – a permanent loss of capital.

3. Pay for sustainability, not for growth
SKS’ IPO was priced expensively, and people were more than willing to pay the price.

The reason – expectations of high growth in the future.

The stock was priced at around 5 times its book value, which was then at a premium, even when compared to some of its more established and more profitable financial sector peers.

As it stands now, forget future growth, investors are not even valuing the stock for the money they’ve invested in the company.

As you can see from the chart below, the stock is currently trading at a price to book value multiple of 0.7 times.

What this simply means is that investors are valuing every Rs 100 invested by them in the company, at just Rs 70.

Source: Ace Equity, Safal Niveshak Research

Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, once said that if he were giving a test calling for an analyst to value a new dot-com internet company, he would fail anyone who answered the question.

Munger’s simple reason was that investors must not pay for any prediction of future sales or profit growth of a company, simply because the future is unseen.

Sensible investors refuse to pay anything for even the rosiest prediction (of future growth) that has no current or historical foundation.

This especially holds true for new businesses and companies like SKS.

The only growth that creates value for shareholders is growth in markets where a firm enjoys a competitive advantage. And microfinance isn’t that sector. It never was.

But who cares when all one sees is listing gains and a business whose future seems brighter than any other business out there?

I believe investors do well when they pay for the sustainability of a business instead if its growth.

I’ll be more than happy investing in a company that I see existing for the next 50 years, even if I see its profits growing at just 8-10% per year, than a company that is growing at 50%+ levels, and thus has a higher chance of tripping over.

When in SKS, just press SOS
When you are faced with a situation like SKS, where you have invested a lot of your hard-earned money only find it all gone, it’s always good to press the distress signal (SOS – save our ship, or save our souls) instead of drowning with the leaking ship.

As Warren Buffett once said, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

In investing parlance, this simply means – cut your losses, come out of such stocks, and whatever you are left with, invest in better-managed businesses.

The longer you’ll stay put with your losses (and your ego), the more you’ll bleed.

So just cut it short. Take your lessons, and move ahead.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Dear Vishal,

    Your conclusion of the above post is exactly what a Smart Investor should do in such a given situation. I do agree with it. But the problem lies in identifying that the companies are really in such bad situation.

    As an example, I would like to highlight Allied Digital Services, which was a promising stock about 18months back. Now the stock has seen lots of erosion in stockvalue. If I look at annual reports, it is quite difficult to identify the problem (I am talking about 2011 report, 2012 report is yet to be out) and the reason for such a huge value erosion. Even the book value, PE ratios at current price is attractive. There were some raids I.T. Dept. in the company later clarified by the co. has regular check by I.T Dept. No other siginificant news came out in.

    My question is not about Allied Digital. I would like to know how a lay investor could identify that the fundamentals and financials are detoriating and how to differentiate between temporary blip and a permanent problem. Most of the time retail investor is the last one to exit and at a distressed price. I myself hold such stocks and holding on to deep losses in Allied Digital, Deccan Chronicle, Ess Dee Aluminium, IVRCL Sintex etc. Is there a simple way out?

    • Hi Ajay, I can understand your predicament seeing a stock fall for no fundamental reason. However this is the case with small and mid cap stocks…especially the companies that are growing fast (like ADSL). You would never come to know what went wrong till things actually go wrong. Even with ADSL, while I have not researched the company, if there are issues that it is facing with the IT deptt, has the company come ahead and tried to resolve the issue? Or is it waiting for things to happen? If the latter is the case, I would take my lesson and book a loss in the stock. But after all my study, I think that the company is fundamentally sound, I will hold on to a part of it and redeem a part of it to reinvest in a better opportunity.

      See, in investing, you will do well if you can get 6 stocks right out of every 10 you pick. So it’s fine if you get 4 stocks wrong. The only thing to keep in mind here is that you must not over-invest in any one particular stocks just because you are overconfident about its prospects. This is where the importance of adequate diversification comes into play.

      As far as other companies like DC, EDA, IVRCL and Sintex are concerned, do you think these are fundamentally nice stories (look at the balance sheet of IVRCL and Sintex for instance, or look at the fact that DC bought an IPL team)?

      My point stock investing is always a gamble but you will win only if you can put he odds in your favour. And that is why it is important to buy ultra-safe companies, with deep moats, and at the right prices. Only then you will make money in the long term (or you will avoid losing much money).

      I hope this makes sense. Regards.

  2. Dear Vishal,

    I came across your blog recently (last month) and have thoroughly enjoyed reading your posts so far – have read almost 50% of them.

    While I broadly agree with your conclusions above, I would like to present the SKS problem from my background (impact investments/ VC) and thus assess the issue from slightly different perspective.

    What I agree with is that a. the issue was over-priced b. people did not and still do not understand microfinance (especially NBFC-MFI’s)

    Microfinance is not new in India – it has more than 20 years history in India and Indian microfinance leader’s are generally respected world-wide because of their professionalism. Microfinance in India comes in three flavors: a. NGO’s / not for profit (based on grants) b. the government schemes (based on government/ public money) c. private microfinance [NBFC’s] (SKS belongs to the third category) and historically in India the 3rd category has been extremely successful (perhaps too successful) and socially impactful [especially in AP] because at the end of the day, the company CEO’s were dealing with private money and social investors (like foreign pension funds, social organizations). In fact, surprisingly, regulated NBFC-MFI’s like SKS are a very small part of the entire microfinance industry.

    The Issue with Impact Sectors like microfinance in general is Political / Vote bank issues. Why? – Microfinance companies pool private money and on-lend (unsecured lending) to people who are not financially included. The problem with that is:
    a. the end customers, the “poor” people, are the vote bank of the Indian political system and they make up more than 80% of the country. It is the lives of many of these folks which were actually improving thru microfinance [based on various metrics (see CGAP reports)]. These customers preferred NBFC’s to govt, because of ease of obtaining loans, transparency (like no greasing to get a loan) and competitive pricing
    b. because it was private money that was being lent out, local leaders could not play the “loan-waiver-before-election” schemes, nor were they getting a piece of the pie of the (private) monies in their district/ villages/ areas
    c. plus because of poor repayment in the govt schemes (around ~60% compared to >98% repayment rates or private player), large funding institutions (esp foreign) threatened to stop giving grants to state sponsored microfinance schemes and instead to channel it to private players
    d. local money lending (which has powerful political connections in sub-urban and rural-India) and charged as high as 1% per day, was taking a hit because of private regulated MFI’s (which are governed by the regulator)

    A combination of all these factors, lead to the private MFI’s in AP becoming the victim of an elaborate and sustained attack on their business through media (example : the stories of suicides – every incident of suicide in AP for whatever reason began to be attributed to MFI’s) and a resulting restrictive ordinance (which has since then become a state Act) to “clamp down” on MFIs. This effectively killed private Microfinance in AP and hence SKS got hurt pretty bad – SKS had a a huge loan book in AP which they had to write-off – their stock price took a massive beating. Their only saving grace was non-AP portfolio. Many AP based private MFI’s with primarily AP portfolio have ceased to exist or gone for debt restructuring.

    If SKS is to blame, it is for lack of geographic diversification of loan portfolio – but no company can do anything if the political establishment is against an industry as a whole. SKS had its own fair share of (internal) problems – but that could have been sorted internally or externally by shareholders in terms of discounted share price. But I believe that he punishment SKS (and other non-listed private MFI’s received) far exceeded their crimes.

    My suggestion to someone valuing an MFI is to look at portfolio, off-balance sheet items (like securitization), geographic concentration, product diversification, leverage, return on equity and asset numbers, loan quality (in terms of portfolio at risk), book multiples. Did any of the research reports or intelligent investors during the IPO focus on these parameters? Some may have, but most continue to look at PE, current ratios etc

    SKS may have been overvalued (disclaimer: I did not buy SKS as I felt that it was over-valued), but the fall that happened (90%) had little to do company’s operations – it was an event on which the company had no/ (very limited) control. [Or perhaps as good managers they should have anticipated political risks and diversified appropriately.]

    Sorry about the long comment and hope it helps in providing a different perspective. Thank you for your blog and your wonderful posts, experiences and insights.which are immensely helpful to people like us.

    Thanks !

  3. Hi Vishal,

    I read this post recently, you must be aware that SKS is now trading at ~120. What are your views on the rise? Especially given the fact that you had declared it as a sinking ship!

  4. Aditya Harite says:

    Just read an article in Fortune magazine regarding SKS. The management has changed, they have trimmed their costs, and also not gone for Debt restructuring. So will the current price a value investment or a value trap. (both of which I am still learning)

    P.S. Came to know of your course and realised it is closed. When is the next course starting ?

  5. Vishal

    Did you had a chance to look at SKS again? Any change of opinion?


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