HDFC Bank: Better run ahead

HDFC Bank should be able to grow even faster in the current fiscal

HDFC Bank's net profit for the quarter ended March 2004 were 18.7 per cent higher than in the immediate preceding quarter. That's a rise in net profit of Rs 24.36 crore. Higher net interest income accounted for merely Rs 6.25 crore out of that sum.

Much of the rise was due to higher "other income", which rose by Rs 19.40 crore over the December quarter. Thankfully, the entire increase in "other income" was on account of higher commissions, fees and forex income, while the bank actually suffered a loss on sale of investments in the fourth quarter.

As a matter of fact, higher fee income and more retail business have been the business drivers for HDFC Bank. Retail banking accounted for 53 per cent of total revenues in FY 2004, wholesale banking accounted for 37 per cent, while treasury operations accounted for the rest.

The picture was different so far as profit was concerned. Retail banking was 31 per cent of profit, wholesale banking 48 per cent, while treasury profit made up the rest.

As the bank management puts it, "During FY 2003-04, growth in the wholesale banking business continued to be driven by new customer acquisition and higher cross sell with a focus on optimising yields and increasing product penetration rather than on volume growth."

The good news is that this strategy has been successful in growing profit despite the falling off of profit on sale of investments.

During FY 2004, the bank's wholesale advances increased by 25.7 per cent, compared with a 112.9 per cent growth for retail loans (excluding growth in the securitisation portfolio).

Going forward, the expansion plans for India Inc hold out the promise of rapid growth for the wholesale banking segment, while there's plenty of scope for retail growth to continue.

The key takeaway from HDFC Bank's fourth-quarter performance is this "" if the bank can grow net profit by 32 per cent year-on-year despite a loss on sale of investments (compared with a hefty profit in Q4, FY 2003) and in spite of higher provisions, the bank should post even higher growth in FY 2005.

As for the scrip, at Rs 380 the stock's price-earnings ratio is substantially lower than the growth rate in earnings per share.

Reliance Energy roars

Reliance Energy Ltd (REL) has quadrupled its Q4 FY04 net profit to Rs 100.38 crore. Analysts point out to various factors that have lead to the improvement in revenue and profit at the company "" the merger of its profitable subsidiaries, BSES Andhra Power and Reliance Salgaocar, with itself.

Also, all the generating power stations of REL have reported improved efficiency via higher levels of utilisation, enabling greater capacity generated than in the previous year and reducing the dependence on purchase of electricity. This improvement was reflected with the company's topline jumping 35 per cent to Rs 823.62 crore, in the quarter ended March 31, 2004.

While the company's core operations have grown, certain input costs have skyrocketed. Cost of fuel has surged 66 per cent to Rs 181.46 crore in Q4 FY04.

International prices of coal have risen by approximately 17 per cent in the first quarter of 2004. These costs are expected to be in check in the future, with the government recently reducing import duties and the company actively taking steps to upgrade its facilities.

In spite of this rising cost, the rise in revenues was more than enough to hike operating profit margins in Q4 FY04 by 975 basis points to 18.8 per cent and operating profit grew 180 per cent to Rs 154.94 crore.

Going forward, the company is planning an aggressive expansion strategy. In the western region it has already filed five applications with Maharashtra Electricity Regulatory Commission ( MERC), coupled with an application for grant of distribution license in South Mumbai, an area which is currently covered by BEST.

Also the company has filed its annual revenue requirement (ARR) petition for FY2004 - 2005, which is a tariff revision petition. Once that is approved by MERC, it would help to drive revenue growth.

In addition, REL has announced that, along with its affiliates, it will invest Rs 20,000 crore over the next five years in enhancing its power generation activities.

The Reliance management has said that the investments planned should catapult the company's net profit into the top ten of India Inc.

In addition, it has announced that it will set up a 3,500 Mw gas -based power plant in UP. This move is expected to help Reliance expand its distribution network in the power starved northern markets by inter-connecting to the respective state electricity boards.

With contributions from Amriteshwar Mathur