SBI: Disappointing data

SBI's net profit is actually lower than the previous year's number

The State Bank of India's annual results for FY 2004 show net profit growth of 18.5 per cent, but if adjustment is made for a change in the method of computing profits on sale of investments, net profits are actually lower than in FY 2003.

It posted a net profit of Rs 3,105 crore in FY03, while the net profit adjusted for the accounting change in FY04 amounts to Rs 2,987.30 crore, a decline of 3.8 per cent.

Small wonder, then, that the SBI stock plummeted on Friday, falling far more than the market. Nor is the poor performance restricted to the calendar year as a whole.

Fourth-quarter operating profits were lower than in Q4 of the previous year, despite the above-mentioned accounting change. Recall that operating profits in Q3, FY 2004 too were lower than in the corresponding period of the previous year.

However, the bank has posted a substantial improvement in net interest margin and its deposit rate cuts and the repayment of its high cost forex deposits has helped curtail interest expenditure.

As a result, net interest income was Rs 3313 crore in Q4, compared to Rs 2773 crore in Q3, which is a sharp jump. But there has been little change in interest earned from advances, and while the domestic loan portfolio increased by 13.58 per cent, lower than the average growth for the banking sector. Clearly, SBI is losing market share in advances.

Moreover, most of the non-interest income growth during the year has been on account of profit on sale of investments, while fee-based income grew by 12.2 per cent. Operating expenses too were substantially higher.

Non-performing assets were 3.48 per cent of advances as at end-March, well above the 2.88 per cent achieved at the end of December 2003, thanks to Dabhol and the 90-day norm, while gross non-performing assets continued to be rather high at 7.75 per cent.

With interest rates having bottomed out, growth in profits will have to come from increased lending. The bank has set tough targets for the current year""""net profit growth has been projected at 23 per cent""-and the management will have to work hard to realise that target.

ITC's surprising data

ITC reported a 23.8 per cent jump in net sales for the March quarter, which is huge considering that sales had grown just 5.6 per cent in the none months till December. True, cigarette sales have been higher in the second half of the year compared with the first six months, but this hardly explains the huge differential in growth rates.

A look at the segment results shows that growth last quarter was driven by the agri business, which grew sales by 63.6 per cent last quarter and accounted for half the company's incremental sales. This was in stark contrast to the 14 per cent fall in sales recorded by this segment in the nine months till December.

Analysts point out that soya exports were strong last quarter, aided by firm prices globally. Soya prices have now come off from their highs, and one should also note that the agri business fluctuates because of seasonal variations. In any case, despite the surge in sales last quarter, the agri business reported margins of less than four per cent.

What's more important is that the cigarette sales have picked up. In the first half period, revenue from cigarette sales had grown just 3.7 per cent.

In the second half, the growth almost doubled to seven per cent. The incremental growth is primarily volume driven, since there haven't been price increases since April last year.

Moreover, for the full year, the division reported a near 100 basis points improvement in operating margin (adjusted for one-offs).

The plethora of other FMCG business - ranging from agarbattis to branded garments - grew smartly by 178.5 per cent, but some of that growth was due to an entry into new segments like biscuits.

But losses in the segment were cut from 112 per cent of sales in FY03 to 57.33 per cent last year. The hotels business rode piggyback on the improvement in the tourism segment, and notched a 33 per cent increase in sales and an extremely high 740 basis points jump in profit margin.

The paper business grew just 7.8 per cent, because of capacity constraints, but sales of value-added products grew 18 per cent.

There's more good news: capacity is set to almost double by the end of this year compared to end-FY03 after the acquisition of the paperboards business of BILT Industrial Packaging (last year) and the capacity expansion being done at the plant in Sarapakka, Andhra Pradesh.

Dividend payout has inched up from Rs 15 last year to Rs 20 this year, but is still a small fraction of the company's free cash flow.

With contributions from Mobis Philipose