Bank of Punjab: A decent bet

Bank of Punjab has got a good valuation for its placement

Bank of Nova Scotia will be picking up around 5 per cent stake in Bank of Punjab together with ICB Financial group Holdings, Switzerland and Bharti Enterprises.

This is not the first time a foreign bank is looking to get a toe-hold in India and Nova Scotia's objectives could be no different from those of the others.

The smaller private banks have been constrained by their size, so any infusion of capital would always be welcome. Bank of Punjab's capital adequacy is fairly strong at 12.68 per cent but if the bank is able to pick up money at a good valuation then there's nothing wrong with that.

And the valuation does appear pretty steep because, at Rs 38, the price at which the fresh issue of shares has been made, the stock trades at 1.65 time price to historical book, and around 2.5 times the book adjusted for NPAs as at end-March, which is certainly not cheap.

What's more, Bank of Punjab's recent performance has been dismal, with its earnings per share falling by more than half in the first nine months of FY 05.

The last quarter has been worse, with EPS falling to 9 paise from Rs 1.15 in Q3, FY04. Net interest income fell by 18 per cent, and operating profits went down by 66 per cent, thanks to much higher expenses.

With the placement there will be a dilution of about 23 per cent so (on pre-issue equity), to avoid an earnings dilution, the bank will have to grow more than that. There are few signs of that happening in the near future. But then such investments are a long-term bet.

Infrastructure

The fears of a slowdown in the infrastructure sector, when the December figures came out last month, have proved to be correct. In December, growth in core industries slowed to 3.6 per cent from 7.8 per cent a year ago.

That was much lower than the November 2004 growth rate of 5 per cent. Data now show that growth has slowed even further in January, falling to a miserable 1.9 per cent, compared with 7.4 per cent in January 2004.

For the first ten months of FY 05, growth in the infrastructure industries has fallen to 5.1 per cent, in contrast to 5.9 per cent in the corresponding period of FY04, and from 5.4 per cent for the first nine months of the current year.

There has been a growth slowdown in steel and refineries, and marginal growth in crude oil. Cement, with 9.6 per cent growth, has been the star performer. For April-January as a whole, growth in steel and refinery throughput has been well below last year's.

The trouble is that while the effect of last year's higher base is undoubtedly being felt, it's also a fact that production is also running up against higher capacity utilisation.

Till new capacities are either de-bottlenecked or come on stream, production seems to have run up against a supply constraint. One consequence of the supply squeeze is higher steel and coal prices, as demand continues to grow but supply doesn't keep pace.

Hindustan Zinc

Brokerages houses have forecast that prices of zinc are likely to remain bouyant in 2005, as the demand-supply gap for the metal is expected to widen.

Zinc prices had averaged $1048 a tonne in CY04, a gain of about 26.5 per cent on a year-on-year basis. Improved zinc prices going forward are expected to help domestic players, such as Hindustan Zinc Ltd, get better realisations and, as a result, ensure strong profit growth.

Investor interest in HZL has resulted in the stock appreciating about 20 per cent over the last five weeks.

Global demand exceeded supply of zinc by an estimated 250,000 tonne in 2004 and with many Asian governments looking at widening their infrastructure network, the gap is set to widen further.

To leverage better demand conditions, it is logical for HZL to expand capacity "" the company is shortly expected to complete its expansion plans for enhancing its zinc output to 4,00,000 tonne.

HZL is already one of the lowest cost producers with cost of production pegged at $560 a tonne and this is set to fall even further, going forward.

The company's 154 mw captive power facilities are expected to be operational shortly and this should bring down its power cost substantially.

Also the steps taken to prune the size of its workforce, should improve operational efficiency going forward. This Sterlite group company had earlier reported a 19.4 per cent growth in its net profit for the last quarter.

With contributions from Shobhana Subramanian and Amriteshwar Mathur