A study in contrast

At first glance, there's much in common between the HDFC Bank and UTI Bank first-quarter results. UTI Bank's net profit moved up 35 per cent, compared with HDFC Bank's 30.5 per cent. Net interest income, however, was up 37.5 per cent for UTI Bank, lower than HDFC Bank's 43.6 per cent.

More importantly, while HDFC Bank's operating profit went up by 21 per cent, UTI Bank's fell 23 per cent to Rs 145.69 crore from Rs 188.76 crore notched up in the first quarter of FY04. A 57 per cent rise in operating expenses was partly responsible.

As a matter of fact, the only way UTI Bank was able to show the high level of net profit growth was because provisions and contingencies are much lower in Q1 this year, especially provision for non-performing assets, which has come down from Rs 87 crore to Rs 5 crore.

However, net NPAs have gone up from 1.03 per cent as at end-March to 1.16 per cent, but with advances at Rs 9,910 crore as at end-June, the difference between 1.03 per cent and 1.16 per cent could be significant in terms of bottomline growth.

With credit growth for the banking industry at a 10-year high, there's no reason why UTI Bank shouldn't continue to improve its performance.

It's strategy is well on track-net interest income is rising rapidly, fee income moved up sharply last quarter, and cost of funds has fallen to a low 4.83 per cent, thanks to growth in savings and demand deposits.

Exide piggybacks auto boom

Exide Industries has benefited from the increased sales of automobiles - its sales in the quarter ended June rose 18.8 per cent to Rs 276 crore. This is despite facing competition from cheaper products, especially from Thailand.

But the real challenge for the company comes from the increase in raw material costs because of a jump in lead prices. Cost of raw materials jumped 340 basis points as a percentage of sales, as lead prices have risen around 15 per cent since January.

Operating profit still grew at a healthy 27.3 per cent, but only because of drastic cuts in staff costs (by 190 bp) and other expenditure (280 bp).

In the past, the appreciation of the rupee against the dollar helped negate the effect of rising lead prices, but now things have got worse with the rupee depreciating.

The company plans to pass on the cost increase to customers, but if lead prices continue to rise, OEM clients are expected to resist a further increase in battery prices.

Going forward, the company is aggressively targeting the Russian submarine market and this is expected to improve profitability.

Also to solve the problem of rising prices of lead, the company is planning an expansion of its grid plate facility at all its manufacturing facilities and this should help reduce lead consumption.

Besides, there is also the lead reclamation project, where it's expected to reuse around 15-20 per cent of lead used in batteries produced through the reclamation process. A reduction in the cost of lead is the key to the company's ability to maintain earnings growth.

iGATE Global's fall from grace

When information technology stocks joined the rally in the equity markets in June last year, iGATE was among the most prominent gainers. By the end of 2003, its stock had jumped 256 per cent, compared with a much lower 108 per cent gain for NSE's CNX IT index.

The story back then was that the restructuring initiatives would result in a disproportional jump in a earnings going forward, especially since the company was guided by a team of top ex-Infosys employees.

But the markets now seem to be getting a little impatient, with hardly any signs yet of gains from the ongoing restructuring. In 2004 till date, the iGATE stock has lost 30 per cent, although the CNX IT index fell just 9 per cent.

Results for the quarter ended June didn't help sentiment much. Revenues fell around 2 per cent sequentially on a like basis (after excluding Red Brigade and Symphoni Interactive). Gross margin fell to below 30 per cent (industry average is around 38 per cent), and operating margin was a dismal 3 per cent.

Offshore billing rates fell 11.7 per cent sequentially, which ties up with the fact that some GE firms (the GE group accounts for 42 per cent of revenues) shifted projects offshore last quarter.

The offshore-onsite ratio fell further to 28:72. The only saving grace was that revenues from clients outside the top 10 grew 16.7 per cent sequentially, which is important since the top 10 account for 70 per cent of revenues. But this will have to translate into considerably better profit for the stock to get back to its high-flying days.

With contributions from Amriteshwar Mathur and Mobis Philipose