Lacking lather

BS Compass

Hindustan Lever's revenues from its continuing businesses rose by 6.8 per cent (y-o-y), but interest on its bonus debentures has led to the company posting negative growth in net profits.

If interest is left out of the picture, profits before interest, depreciation and tax rose by 3.5 per cent. Although sales have risen, they haven't increased by enough to offset the higher interest outgo. Operating margins have increased slightly, thanks to reduced spending on advertising.

While topline growth was better, the appreciating rupee affected exports. The company's ice-cream business continue to decline in value terms.

Sales growth was fuelled by personal products, which also saw margins improving. Sales were flat in the soaps and detergents segment, and margins have fallen.

Although beverages have done better, margins have been squeezed. Margins on exports were dismal. Total segment results (before interest expenses and unallocables) are actually lower than in last year's September quarter. The higher volumes have come at the expense of lower profits.

Going forward, lower palm oil prices, the divestment of its loss-making oil and fats business and the good monsoons may help offset the structural headwinds faced by the company. Going by the HLL stock, however, the market doesn't seem to believe that.

State Bank of India

State Bank of India's operating profits grew a phenomenal 70.41 per cent in the September quarter. However, net interest earned rose by a mere 0.7 per cent, and only a massive increase in profits on sale of investments led to the rise in profits.

Net profit growth was much lower, at 21 per cent, thanks to the large provisions made. With the premium on the debt buyback programme ( Rs 1010 crore) earmarked for additional NPA provisions, the bank's net NPA to net advances ratio has fallen steeply to 2.56 per cent.

Practically all the rise in other income is due to capital gains, which means that fee income has not grown much. The net interest margin for the first half as a whole was 2.79 per cent, much lower than Q1's 3.01 per cent. Return on equity for the half year, at 19.79 per cent, is lower than Q1's 20.17 per cent. Growth in advances has decelerated further.

Going forward, net interest earned should rise as the economy gathers momentum, while the return of the RIBs should expand net interest margins. But the bank expects net NPAs to rise, and it may need to continue to make substantial provisions. Nor will the supernormal capital gains be available.

Tata Steel

The bull run in steel continues and is vindicated by Tata Steel's performance in the September 2003 quarter. Against a topline growth of 28 per cent, its bottomline doubled to Rs 403 crore compared to the corresponding quarter last year. Domestic sales grew by 31 per cent while exports fell 3 per cent.

Staff cost has jumped 27 per cent . This was on account of a provisioning of Rs 78.98 crore for wage agreements with the labour union at its collieries, since the amount has not been finalised.

Excluding the provisioning, operating margins were higher by 200 basis points compared to 30 per cent in the first quarter. Secondly, if we exclude the provisions, then staff costs show a marginal hike of only 2.5 per cent. Thirdly, other income has gone up 291 per cent to Rs 56 crore.

The only other concern is how exports to China will perform in the second half since India has already exceeded its quota. But that does not significantly impact Tata Steel since exports form only 13 per cent of its turnover.

Tata Steel continues to be a growth story and its stock is discounted a mere 9 times FY04 earnings.

With contributions by Sameer Ranade