Low on banking

PSU banks emerge the biggest losers as the Bankex crashes following CRR and deposit rate hikes.

The BSE Bankex crashed nearly 464 points today in the wake of the Reserve Bank's move to hike cash reserve ratio (CRR) by 50 basis points and also increases in deposit rates by some banks. PSU banks were the biggest losers with SBI, PNB, BoB all declining 8 per cent.

The four-month rally in banking stocks, which began in late July, had ben driven by a combination of falling bond yields "" it was the first quarter in more than two years that long-term bond yields declined "" and lower loan loss and investment provisions, as seen in the September quarter profits.

Q2 FY07 numbers pointed to slowing loan growth, though the rate of growth remained higher than historic levels. They also indicated that loan yields were 50-75 basis points higher, y-o-y, with home loans and car loans having risen 100-200 basis points.

However, despite this, net interest margins (NIMs) remained stable for most banks with only a few managing to notch up better NIMs. With borrowing costs on the rise "" whether through deposits or subordinated debt, needed to shore up capital adequacy "" NIMs could be under further pressure, unless banks are able to pass on the costs to borrowers.

Banks have been fairly successful so far in both "" raising the prime lending rates (PLR) and minimising loans at sub-PLR rates. Even retail loans have been priced higher without much resistance.

However, deposit rates are going up and the higher CRR will add to margin pressures since banks earn nothing on these funds.

The slowing loan growth, coupled with higher borrowing costs, could thus dampen the numbers. Valuations are not cheap: The most expensive stock HDFC Bank trades at five times FY07 book value, while ICICI Bank trades at around three times, and SBI and PNB trade at 1.5 times.

Stock markets: More corrections likely

There had been enough negative indicators for the domestic stock markets to sustain at higher levels for the past few weeks.

Breadth was negative and a handful of stocks were keeping the Sensex high. But a fall of nearly 500 points in the Sensex today means that market participants are a worried lot.

Unlike the decline in May 2006, which was a global problem, today's fall is similar to that seen in May 2004 when the NDA was voted out. This time too, it is a local issue, which brought about a broad sell-off.

Other Asian and European markets were trading at similar levels on Friday. No doubt, that the stock market is expensive at a trailing P/E multiple of 20.35 times and an estimated P/E of 19.65 times based on today's closing, but that has not stopped FIIs from buying stocks. Till December 7, FIIs invested Rs 37.742 crore "" similar to the fund flows last year.

Market analysts say local investors have not been as active in the current rally as they were in May. What the free fall indicates is that the market, perched at high levels, becomes more vulnerable to negative developments. Most global markets are at their recent highs and if the positive news flow stops on the global front, we could see more corrections here.

Rico Auto: Weak numbers

Rico Auto Industries' September 2006 quarter performance has been adversely affected by rising operational costs, coupled with lacklustre sales growth from its key customer Hero Honda.

As a result, Rico saw its consolidated operating profit remain more or less flat on a y-o-y basis at Rs 26.8 crore in Q2 FY07, compared with 6.3 per cent growth in net sales to Rs 211.4 crore.


However, its consolidated operating profit margin declined 80 basis points y-o-y to 12.7 per cent in the last quarter. The company felt margin pressure because its other expenditure jumped 21.3 per cent y-o-y to Rs 37.49 crore in the September quarter and staff cost 24.8 per cent.

Rico Auto manufactures high-precision aluminium and ferrous machined components and assemblies to auto companies. The fact that two-wheeler major Hero Honda, which contributes about 60 per cent to Rico's total revenues, lost a significant market share in the quarter, had a negative impact on Rico, say analysts.

In fact, Rico expanded its exports in the quarter to offset that. The company has lined up Rs 200 crore capex to ramp up its capacity. However, with the concerns on the client concentration front remaining intact, the stock appears expensive at its current P/E, 17-18 times estimated FY07 earnings.

With contribution from Shobhana Subramaninan and Amriteshwar Mathur