SBI: Mixed show

SBI's top line affected as interest income on securities declines. Core banking operations, however, show improvement.

SBI's June results have been slightly better than market expectations, so it was no surprise to see the stock appreciate 4.3 per cent on Friday against the Sensex losing 0.6 per cent.

After excluding the one-time interest on income tax refund, the bank's net interest income has gone up 9.68 per cent.

Though the growth in interest earned (after the refund) was low at 4.5 per cent, the interest expended went up just 0.79 per cent y-o-y. Its top line was affected as interest income on securities declined by 21.8 per cent.

But it managed to control its interest expense in Q1 at about the same level as last year's, which resulted in the growth in net interest income. The bank's cost of deposits has gone down by 8 basis points in a rising deposit rate scenario as its low cost deposits (savings and current accounts) have gone up 440 basis points.

Even the IMD redemption has resulted in a drop in the bank's cost of funds. Higher yields on advances (up about 70 basis points y-o-y) resulted in the net interest margin improving 23 basis points to 3.77 per cent.

The bank's inability to grow other income in Q1 is disappointing. Other income went up just 11.8 per cent over June 2005. Its fee income went up by just 3.75 per cent y-o-y, which looks tiny as compared to ICICI Bank's 50 per cent growth.

Retail advances as a percentage of total advances at 26.4 per cent are also lower than ICICI Bank's 67 per cent. Higher wages and other operating expenses meant that its costs were 17.57 higher over June Q1 FY06.

Pre-provisioning profit was up 4 per cent after excluding the one-time item. A 68 per cent rise in the tax provisions resulted in the net profit falling short of analyst expectations by about Rs 150 crore to just under Rs 800 crore.

But analysts are happy about its lower cost of funds and the improvement in its core banking operations""advances and interest on advances went up 21.4 per cent and 38 per cent y-o-y respectively. Net NPAs were also down from 1.87 per cent in March to 1.69 per cent last quarter.

The bank needs to fix its fee income back to the 15-20 per cent growth levels. The impact of higher salaries seen in the past four quarters will stop from the next quarter as wages were hiked in July 2005, which should have a positive effect on the operating profit.

The bank trades at a reasonable valuation of 1.3 times standalone estimated book value and about once consolidated book value.

HPCL: Subsidy burden takes toll

Hindustan Petroleum's June 2006 quarter corroborate the difficult environment for oil marketing companies, given their inability to raise retail auto fuel and LPG prices in tune with global crude prices.

In addition, the company has not yet received the oil bonds from the government for FY07 in the last quarter.

As a result, the company saw its operating loss amount to Rs 516.61 crore in Q1 FY07 as compared with an operating loss of Rs 373.64 crore a year earlier, despite net sales expanding 36.95 per cent y-o-y to Rs 20,674.1 crore.

The stock has substantially under-performed the broader market over the past three months""it has lost 32 per cent during this period as compared with a 10.1 per cent drop in the Sensex.

However, in the March 2006 quarter, the PSU had received oil bonds and it helped its operating profit reach Rs 1952.75 crore in that quarter as compared with Rs 456.42 crore a year earlier.

HPCL's under-recoveries (prior to subsidy sharing) for auto fuels, LPG and kerosene was approximately Rs 3460 crore in the June 2006 quarter as compared with Rs 2000 crore a year earlier.

Upstream players like ONCC and GAIL have provided a combined Rs 1236.11 crore in Q1 FY07 as compared with Rs 686.9 crore a year earlier, as per the subsidy sharing formula. In addition, refiners have shared Rs 90.42 crore of the subsidy burden in the June 2006 quarter.

Meanwhile, surging under-recoveries for auto fuels, LPG and kerosene were partially offset by improved performance of the company's refinery division. HPCL's throughput amounted to 4.14 million tonne in the last quarter as compared with 2.97 million tonne a year earlier.

Also, the gross refining margin at its Mumbai refinery was at $8.82 in the June 2006 quarter as compared with $3.97 per barrel a year earlier.

The benchmark Singapore refining margins was at $8.9 a barrel in the last quarter. Going forward, given the difficulties in raising retail fuel prices, the company's performance is expected to improve only after it receives the oil bonds from the government.