SBI: Faux relief

One-off items boost SBI's bottomline

State Bank of India's results for the first quarter have been skewed by one-off items: Rs 711.90 crore being the interest on income-tax refund and Rs 86.86 crore on account of a change in the accounting for investments in regional rural banks.

After adjusting for these items, the net profit for the first quarter of FY06 is much lower than the Rs 1,222.83 crore declared, and well below net profit for the first quarter of FY05.

At the operating level, however, there has been substantial growth. That has been made possible by loans growing at a scorching 32.5 per cent year-on-year compared with a growth of 26.9 per cent in FY05.

This surge in advances led to net interest income rising by 19.88 per cent y-o-y in the first quarter (excluding the interest on income-tax refund). That rate of growth is well below the 24.66 per cent growth during the previous year.

Fee income growth too hasn't been up to the mark--other income excluding profit on sale of investment and dividend rose by 7.93 per cent in the first quarter. However, net interest margin (excluding one-off items) was 3.14 per cent, against 2.99 per cent in the corresponding quarter of FY 05.

Bottomline growth has been affected, primarily because of a provision of Rs 1,308.33 crore on account of depreciation in investments "" the impact of another transfer of securities to the "held-to-maturity" category. NPAs have been lower.

With its capital adequacy ratio at 11.63 per cent (Tier-I at 7.88 per cent) and with Basle -2 looming ahead, it is time for the bank to approach the market.

Grasim

Grasim reported a 41.8 per cent jump in its consolidated net profit for the quarter ended June 2005, on the back of a mere 8.4 per cent increase in net sales. But looking at the consolidated set of numbers gives a lopsided view because of the dramatic turnaround in the company's cement subsidiary.

The stand-alone performance was far from impressive. Sales grew just 2.4 per cent and operating profit fell by 13 per cent owing to a 425 basis points drop in margin.

Just as in the March quarter, the overall performance was pulled down by the VSF (viscose stable fibre) and the sponge iron business. Textile producers have increasingly shifted to cotton lately because a bumper crop saw prices dropping.

VSF producers had to take a price cut, which is reflected in a 5 per cent year-on-year drop in Grasim's realisations for the product. Volumes fell by 13 per cent, and both these factors together led to a massive 870 basis points fall in EBIT margin.

Also, owing to an increase in the import of scrap, sponge iron volumes fell by 22 per cent. Although realisations were 12 per cent higher, margins were hit badly because of the drop in volumes and also on accounting of soaring natural gas costs.

EBIT of both these divisions (which accounted for over 65 per cent of the company's total EBIT) fell by over 40 per cent in the June quarter The fall in overall operating profit was restricted to 13 per cent, thanks to a steady improvement in the cement business (segment profit up 15.4 per cent) and a massive 338 per cent jump in the profit of the chemicals business.

Exide

Exide's purchase of 49.13 per cent of ING Vysya Life Insurance for a sum of Rs 203 crore may not be such a bad idea after all. That's because the company is not going to leverage itself to fund the deal. The official explanation is that it is simply an investment as of today.

Companies such as ICICI Bank, Indian Rayon and Bajaj Auto, which have sponsored insurance subsidiaries are all getting a better valuation from the markets, especially where the business is doing well.

Unless ING Vysya makes some serious mistakes, it should not be difficult to do well in India where the penetration is abysmally low. And if it does exceptionally well, Exide will get a better price when it exits.

In CY04, ING Vysya's premium income grew 312 per cent to Rs 151 crore. In other words, while there will be no immediate pay-off, the Exide shareholder may gain if the market factors in the potential of the insurance business.

The management says Exide has enough cash to pay for the stake and will not need to borrow. The cash on the books at the end of March 2005 was around Rs 125 crore.

It also claims that it will not be diverting cash from its core operations in the future to fund the insurance outfit. That would be done from money hitherto used for capex and pre-paying debt, estimated at Rs 50 crore annually.

Meanwhile, Exide posted a good topline growth of 20.6 per cent for the quarter ended June 2005. But higher lead prices have once again pushed up costs, reflected in the 500 basis points increase in the ratio of raw materials to sales.

As a result, the operating profit grew just 3.3 per cent and the operating profit margin dropped 268 basis points to 16.02 per cent. The company has managed a net profit increase of 31.5 per cent to Rs 24.2 crore, thanks to higher other income and a 64 per cent fall in interest costs.

With contributions from Mobis Philipose and Shobhana Subramanian