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SKS Microfinance Jumps in IPO Debut – WSJ.com

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By JOHN SATISH KUMAR

MUMBAI—Indian microlender SKS Microfinance Ltd. climbed 11% on its stock-market debut, as investor expectations of strong growth helped overcome its high valuation.

SKS Microfinance, which counts among its investors George Soros’ Quantum Ltd., Sequoia Capital, Kismet Capital, Unitus, venture capitalist Vinod Khosla and Infosys Technologies founder N.R. Narayana Murthy, closed at 1,088.58 rupees, up from its 985-rupee offering price.

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Bloomberg NewsA woman receives a micro-loan during a meeting organized by SKS Microfinance Ltd. in Sadasivpet, India, on Friday, Aug. 6, 2010.

The stock offering, the first of its kind in India for a microfinance institution, has attracted significant attention to an area that is still developing as an organized sector of the economy.

SKS is the country’s largest microlender by market share, outstanding loans and number of borrowers. It provides credit to India’s poorest in what is probably the world’s largest microfinance market, with 150 million households that don’t have access to banking and financial services, the IPO prospectus said, citing World Bank estimates.

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Agence France-Presse/Getty ImagesSKS Microfinance clients ring in the microlender’s stock-market debut at the Bombay Stock Exchange on Monday.

The Indian microfinance sector had an estimated 22.6 million clients in 2009, according to data from Sa-Dhan, an agency that reports on microfinance.

“The opening was broadly in line with market expectations due to high institutional investor interest, but high valuations are likely to prevent further upsides from these levels over the next 12 to 18 months,” said Vaibhav Agrawal, vice president of research at Mumbai-based Angel Broking.

Mr. Agrawal said he is advising investors to book profits at current levels from a one-year perspective.

“The company is probably going to come to the market every two years to raise capital, so the next capital-raising cycle may present an interesting point of entering the stock again,” he said.

At current levels, the stock trades at 26.3 times estimated earnings for the fiscal year that began April 1 and at 18.4 times its estimated earnings for the fiscal year that begins April 1, 2011.

But it trades at 40.3 times earnings for the last fiscal year, compared with a global average of 19.1 times. It trades at 5.8 times trailing book value after the IPO, according to the estimates of brokerage Execution Noble. Its global peers trade at 3.7 times trailing average.

Angel Broking says it recommended that investors subscribe to the share sale despite its expensive valuations, based on “the strong and sustainable growth and return on equity prospects for the company.” But Execution Noble maintained that its rich valuations don’t factor in some risks.

SKS

Bloomberg NewsSKS founder Vikram Akula.

“The valuation factors in expectations of significant return of equity expansion in the future to which we see challenges from competitive, political and regulatory risks to yields, a likely uptick in credit costs and limited operational and financial leverage,” a house note from Execution Noble said.

Analysts say the microlender can sustain a return on equity of between 20% and 25%.

It plans to use the proceeds of the offering to shore up its capital base.

Kotak Mahindra Capital Co., Citigroup Global Markets India Pvt. Ltd. and Credit Suisse Securities (India) Pvt. Ltd. were in charge of the IPO.

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