ICICI Bank: Growth pains

The pressure points are visible. A slower growth in retail assets "" 3 per cent net of sell downs "" a net interest margin of just 2.4 per cent "" way below peers "" and a slight increase in the net non-performing loans ratio.

The moderation in credit growth and a more difficult environment have resulted in India's second largest bank, the private sector ICICI Bank, turning in just satisfactory numbers for the March 2008 quarter. There are no signs of any major provisions for possible defaults by companies who have incurred mark-to-market losses on derivatives products.

The bank has, however, provided a sum of $100 million for assets held by it overseas which resulted in a huge 63 per cent fall in treasury income to just Rs 164 crore in the March 2008 quarter and capped the bank's total income growth at just short of 20 per cent.

By keeping expenses in check, ICICI Bank has managed to grow pre-provisioning profits by 28 per cent to Rs 2,291 crore "" this is, however, way below the 35.5 per growth cent in pre-provisioning profits for the year. However, with provisions up just a moderate 8 per cent, the bank managed to post a net profit growth of 39 per cent for the quarter of Rs 1150 crore.

Among the bright spots is a higher proportion of cheaper current and savings accounts which grew to 26 per cent at the end March 2008. ICICI Bank has ended FY08 with a net profit of Rs 4158 crore, a rise of 33 per cent.

Given the moderation in credit growth to 15 per cent, as also chances of lower fee income growth in FY09, earnings should grow at a compounded 25-26 per cent over FY08-10.

The stock has lost nearly 40 per cent in the March quarter though it was up 4.5 per cent on Friday ahead of the results. At the current price of Rs 916, the stock trades at 2 times book and is attractively valued.

Hero Honda: Can't sustain the pace

India's biggest motorcycle maker, Hero Honda, surprised the street with its low raw material bill and subdued ad spends for the March 2008 quarter. The Rs 10,335 crore firm managed a 460 basis point rise in the operating profit margins "" on a low base of March 2007 "" taking them to 14.8 per cent.

It's been a difficult year for the bike maker "" it sold, more or less, the same number of bikes in FY08 as it did in the previous year. But some of its models "" in the executive and premium segments, like the 150cc Hunk "" have fetched better prices without the company spending too much on promotions. That, together with some cost management, helped it post an increase in earnings of 13 per cent.

Unfortunately, the good performance is unlikely to be sustained. The two-wheeler industry remains in a slump with customers staying away because they're not able to access cheap financing schemes as interest rates remain high.

Companies for their part, are in trouble because prices of key raw materials like aluminum and steel continue to rise, and they're not able to pass on the increased costs because demand is so weak.

Hero Honda should fare better than its peers in the marketplace: Bajaj Auto's XCD hasn't exactly set the market on fire, so Hero Honda should very easily protect its turf. It should manage to sell more bikes in FY09, but will not be able to price them the way it may want until consumer demand picks up.

Though the stock has stayed put in the last three months in a falling market, it's unlikely to give investors any meaningful returns in the near term.

Hero Honda is expected to close FY09 with revenues of Rs 11,500 crore and a net profit of Rs 1100 crore. The stock rallied on Friday, but at Rs 807, trades at just over 14 times estimated FY09 earnings and is a tad expensive.