PNB: Driven by CAR

PNB's floating stock will rise sharply post-issue

The bank says that compared with its historical CAR of 12.58 per cent as on September 30, 2004, the figure would be merely 9.85 per cent if the Basel II norms are applied on a pro forma basis on that date.

That explains why PNB is coming out with a public issue even though its CAR on December 31, 2004, was 13.11 per cent.

The dilution will be of 8 crore shares or slightly more than 30 per cent of pre-issue equity, but the final dilution will be only of 5 crore shares or around 18.8 per cent, because of the capital reduction.

It's worth noting, however, that earnings per share for the first nine months of FY05 increased by 29.4 per cent, well above the extent of dilution.

The announcement of the price band has been made very close to the issue because of the uncertainty surrounding the Union Budget. At Rs 390, the upper end of the price band, the price-earnings ratio taking the annualised nine-month profits and the post-issue, post-capital reduction, earnings per share is not out of line with some other public sector banks, as is the book value per share.

While a possible merger with IFCI remains a risk, a merger will have tax advantages. The bank has negligible NPAs, its net interest income rose by 17 per cent in the last quarter, its cost of funds is low, and its volume of advances rose by 24 per cent.

This is one of the better-run public sector banks and it should benefit greatly from the coming investment boom. On the other hand, floating stock will go up very substantially (by 150 per cent) post-issue.

FIIs already hold 14.15 per cent in the company, close to the 20 per cent cap permitted, which means that other long-term investors must step in to absorb the increased floating stock post-issue. Otherwise, the issue could be a drag on the stock.

MICO

MICO has reported a 37 per cent growth in its profit before taxation (excluding provisioning for other items) to Rs 559.7 crore in CY04.

Meanwhile investor interest for the auto ancillary sector has enabled this MNC stock to gain 4.3 per cent over the last month. The company derives about 40 per cent of its revenues from diesel fuel injection systems and spark plugs to the commercial vehicle and tractor industry.

Buoyant demand conditions from the end user industry helped its key automotive products division to grow 22.3 per cent to Rs 2150.6 crore in CY04. The company, like other players in the auto industry has had to face higher input costs like steel.

However, its leadership position in the fuel injection technology has enabled the automotive products OPM to rise 232 basis points to 23.56 per cent in CY04.

Also strong demand for its car audio systems and security systems has helped segment profit to grow 139.7 per cent to Rs 18.7 crore in CY04.

As a result, overall operating profit margins of the company have grown 95 basis points to 25.17 per cent in CY04.

Meanwhile, for the December quarter the company has declared a 29.3 per cent growth in its profit before tax (excluding provisions for other items) to Rs 128.9 crore.

The company is currently implementing a Common Rail Direct Injection (CRDi) project and commercial production is expected to commence in CY06. Hence revenues from this project coupled with buoyant demand conditions from the auto industry should help drive earnings. The stock appears reasonably valued, trading at 12.4 times estimated CY06 earnings.

Apollo Tyres

Apollo Tyres has announced a 2-4.5 per cent price reduction in its products, putting an end to the suspense on how much of the excise saving would be passed on to customers.

Excise on tyres, tubes and flabs was cut from 24 per cent to 16 per cent, which would result in 5-odd per cent saving on selling price. The fact that Apollo has cut prices between 2-4.5 per cent means that part of the saving would flow directly into its bottomline, and hence ease some of the pressure on its margins.

The Apollo Tyres stock rose almost 4 per cent on Friday, taking its post-budget gains to over 11 per cent. Apollo's margins have been under pressure lately mainly because of higher rubber prices (50 per cent of raw material costs).

Besides, prices of nylon tyre-cord, which account for approximately 27 per cent of raw material expenses, have also been higher on a y-o-y basis because of higher crude prices. In the December quarter, operating profit was flat at Rs 42.26 crore despite a 19 per cent jump in sales.

The trend wasn't much different for the nine-month period ended December, where operating profit rose a mere 1.7 per cent, despite sales increasing 12.5 per cent.

Apollo's financials were hit further this fiscal because of forex losses relating to the company's interest payments on foreign currency loans. Interest cost jumped 118 per cent as a result, which in turn led to a 13 per cent drop in profit before tax.

As a result, Apollo's FY05 EPS is estimated to be only around Rs 18, which discounts its current price over 17 times, which is rather high especially considering the commodity nature of the business.

With contributions from Mobis Philipose and Amriteshwar Mathur