Investment gain

BS Compass

It's true that the HDFC Bank scrip didn't join the party in banking stocks, but it nevertheless outperformed the Bombay Stock Exchange Banking Index since the beginning of the month, no doubt in anticipation of the results. Now that the results are out, profits were speedily booked.

Operating profits are up a stunning 49.9 per cent, year-on-year. But part of the rise is on account of a gain of Rs 38.6 crore on sale of investments "" these profits were a mere Rs 4.2 crore in Q2 last year, and the net increase of Rs 34.4 crore accounts for a substantial chunk of the growth of Rs 74.64 crore in operating profit.

The rest of the climb up in profits has been due to a 51 per cent rise in net interest income (interest earned less interest expended). Higher asset growth (core customer assets grew by 43.1 per cent y-o-y, compared with 39 per cent y-o-y in Q1 last year), and an improvement in net interest margins were responsible for the rise.

Interest expended as a percentage of interest earned fell to 51.2 per cent, compared to 60.7 per cent during the same period last year. Commissions, fees and forex revenues also rose by around 22 per cent.

The bank's retail assets rose 132.9 per cent, y-o-y, compared with a rise of 90 per cent in the year ago period. Now that the bank's arrangement with HDFC enables it to book income from housing loans, the impediments to asset growth have been removed.

Nevertheless, it is also a fact that a large chunk of the increase in profits before tax is due to the higher capital gains booked in Q1.

With interest rates bottoming out, this source of income will dwindle, while, unlike many other banks, HDFC Bank cannot gain from either lower provisioning, nor from the foreclosure law. Together with the bank's high discounting, these considerations weigh heavily on the stock.

Hughes Software

News Corporation's decision to make an open offer to shareholders of Hughes Software Systems (HSS) has caught most investors unawares. Not that it matters much, because the offer price of Rs 232 is at a discount to the current market price of Rs 252.3.

News Corporation had announced its take-over of Hughes Electronics back in April. Since Hughes Electronics' Indian subsidiary, Hughes Network Systems India holds a majority stake in HSS, an open offer was anticipated.

It's the timing that has surprised. According to analysts, News Corp's acquisition got completed only now, which is the reason for the open offer. The offer price of Rs 232 is based on the average closing price in the last two weeks.

The average of the closing prices in the last six months works out to just Rs 190. But that doesn't mean the offer is attractive - after Infy's results, the share price of HSS has jumped to over Rs 250. Also, given the recent improvement in the company's business fundamentals, analysts are recommending a hold on the stock.

Global telecom majors have increased outsourcing activity lately, which has led to a considerable improvement in the performance of HSS's core telecom business.

As a result, it has also decided to go slow on its plans to enter the BFSI (banking, financial services and insurance) space. This move has been taken well by the markets, as an entry into a new vertical could have been a drag on profitability.

With contributions from Mobis Philipose