HDFC Bank: Bucking the trend

Even as other banks are reeling under rate pressure, HDFC Bank has managed to post healthy numbers.

Yet again, HDFC Bank has met all expectations of delivering a strong performance in the September 2006 quarter. Even when other banks are reeling under interest rate pressure, HDFC Bank has managed to post healthy improvement in its numbers.

So, it is no surprise that when the sector does well, like it did in the last quarter, its performance would improve. The bank's balance sheet size increased by 39.7 per cent and the quarterly EPS went up 38.3 per cent.

Despite a 92 per cent y-o-y rise in interest costs, net interest income increased by 38.1 per cent y-o-y. Other income went up 52.9 per cent on account of a 44.2 per cent increase in fees and commissions.

Operating profit increased an impressive 41 per cent and that would have been even higher, had employee costs and other operating costs not risen 57 per cent and 39 per cent, respectively.

These costs would have been higher had HDFC Bank not met restrictions to open more branches. Since it earns better yield on its assets, its net interest margin at 4 per cent, was at the same level as in the previous quarter.

Cost of funds remained lower owing to a high proportion of current and savings deposits, which stayed at 52 per cent. At 56 per cent of total advances, retail loans grew 44.4 per cent y-o-y compared with 35 per cent growth in total advances,.

The bank had raised tier-I and tier-II capital through bonds during the quarter, so its capital adequacy improved 40 basis points over Q1 to a comfortable 12.1 per cent.

No equity dilution is expected in the near future. As the environment for banking has improved, this bank should continue to do well. Given that bank stocks have done well, HDFC Bank trades at an expensive 5 times and 4.2 times estimated FY07 and FY08 estimated book value.

Bharat Forge: Smooth drive

Bharat Forge's decision to start focusing on non-auto component supplies to sectors such as aviation and energy where the margins are better than those for the auto component segment, makes for a sound strategy.

The management believes it can notch up a turnover of Rs 1,000 crore from that business by 2011, with an investment of just about Rs 350 crore. The seemingly low investment is because some of the existing infrastructure can be leveraged.

Moreover, the company has access to steel through its group company Kalyani Steels, which just acquired a plant on Monday.

Of course, it will also use the inorganic route just as it has for auto component so that it gets hold of technology and is targeting a contribution to revenues of 30 per cent from the non-auto segment.

Meanwhile, Bharat Forge hopes to increase its operating profit margin by improving efficiencies at its overseas subsidiaries through better capacity utilisation. It hopes to be able to achieve consolidated operating margin of around 20 per cent in the next couple of years.

In the September quarter, consolidated margins are down by about 200 basis points at 16.5 per cent, though standalone margins have expanded. Standalone revenues at Rs 470 crore have grown a smart 21 per cent, while exports grew 22.5 per cent.

The four large contracts of $50 million each will help in the company's exports doubling by end 2008 from last year's levels of $145 million. At the current price of Rs 361, the stock trades at 26 times estimated FY07 earnings and just under 20 times FY08 and should outperform.

UltraTech: Turnaround saga

The buoyancy in the cement sector was already demonstrated from Shree Cement's September 2006 quarter results last week.

UltraTech Cement has also reported a sharply improved performance for the last quarter""the company has seen has seen its operating profit grow by an impressive 291 per cent y-o-y to Rs 254.5 crore in Q2 FY07 compared with 57.1 per cent growth in net sales to Rs 1,004.54 crore.

However, the results of the September 2006 quarter are not strictly comparable with a year earlier, as UltraTech had merged Narmada Cement with itself from October 2005. Nevertheless, the merged entity had seen its operating profit margin grow by 1514 basis points y-o-y to 25.3 per cent in Q2 FY07.

As a result, it was no surprise that the stock has outperformed over the past three months""it has gained 27.2 per cent during this period, as compared to a 25 per cent rise in the Sensex.

Earlier, Shree Cement had seen its operating profit margin improve by 1156 basis points y-o-y to 45.16 per cent in the September 2006 quarter.

UltraTech has benefited from improved cement despatches and prices in the last quarter, on a y-o-y basis. The company's cement despatches grew 17 per cent to 36.81 lakh tonne in Q2 FY07.

Also, its realisations have improved 34 per cent y-o-y to Rs 2728.9 per tonne in the last quarter. This rise in realisations helped offset rising input costs.

For instance, freight and handling expenses were up 42.94 per cent y-o-y to Rs 206.21 crore. The UltraTech stock trades at 17-18 times estimated FY07 earnings, given the growth prospects in this sector in the medium term.

With contributions from Shobhana Subramanian and Amriteshwar Mathur