UTI Bank: On a roll

Growth in advances, fee income has kept the momentum for UTI Bank

UTI Bank has continued with its business momentum of the past few quarters "� including the June quarter "� as growth in advances and fee income has been robust.

However, though net interest margin (NIM) had improved by 36 basis points y-o-y to 2.96 per cent in the March 2006 quarter, it has gone down to 2.68 per cent in Q1, as the bank was not able to pass on the higher cost of funds, which went up by 50 basis points y-o-y to 5.45 per cent.

Besides pressure due to higher interest rates, the faster advances growth (at 65 per cent y-o-y) was funded by high-cost term deposits.

Deposit growth was relatively slower at 36 per cent y-o-y, though the growth in low-cost deposits (current and savings accounts) was better at 52 per cent. But the decline in net interest margin was compensated by a fee income growth of 60.7 per cent y-o-y.

UTI Bank's thrust on the high-margin retail sector continued in Q1 FY07, with retail advances rising to 30.3 per cent of total advances in the June quarter compared with 27.6 per cent a year earlier. Total advances grew 65 per cent.

On the back of a strong advance growth, the bank's net interest income shot up 44.7 per cent y-o-y.

Provisioning zoomed 96 per cent, mainly because of a change in the valuation norms of tax-free bonds.

The bank's capital adequacy ratio at 10.28 per cent is already low, and it plans to raise tier-1 capital this year.

The management says the decline in NIM would be covered up once advances growth becomes modest and interest rates stop rising. The UTI Bank stock ended the day up 1.5 per cent and is trading at a reasonable 2.3 times estimated FY07 book value.

Tata Coffee: A strong blend

To help finance the acquisition of Eight O'Clock Coffee, Tata Coffee is issuing 62.34 lakh partially convertible debentures (PCDs).

For every two equity shares held, shareholders will get one PCD comprising one equity share at Rs 250 and one non-convertible debenture (NCD) of Rs 150.

The NCD, which carries a coupon of 7 per cent, will be redeemable in equal instalments of Rs 50 each at the end of the fourth, fifth and sixth year. They will also be listed.

The ex-rights price, assuming a market price of Rs 360 (Wednesday's closing), will work out to around Rs 323. (The average of one hundred shares at Rs 360 plus 50 shares at Rs 250.) This is the break-even price, so for a shareholder to make money the price will have to go beyond this.

As for the debenture, a shareholder may have to sell it at a slight discount and lose around Rs 20 in the process.

Thus, the ex-rights price needs to be Rs 343 for a shareholder to break even.

Tata Coffee's EPS in FY06 was Rs 18. If another Rs 40 crore of profit from Eight O'Clock Coffee (since it will be a 100 per cent subsidiary) after adjusting for interest payments on the debentures is added, the EPS on the expanded share capital will be around Rs 34, and if one were to assign a multiple of 15 times, the price works out to Rs 510.

The company has good growth prospects, especially after its buyout of Eight O'Clock, which gives it a strong brand, as well as a distribution clout in the world's largest coffee market.

While it may take some time for the benefits of the acquisition to flow in, Tata Coffee should be able to leverage the brand. Investors who have bought the share at a price lower than Rs 360 should gain.

Pharma: Q1 may be a mixed bag

The June 2006 quarterly results from the pharma sector are expected to be a mixed bag. MNC players, which derive an overwhelmingly large proportion of their sales from the domestic market, are expected to see a drop in their sales and operating profit on a y-o-y basis in the June quarter, say analysts.

That's because in the June 2005 quarter, sales had seen a substantial improvement, after the widespread destocking that had taken place in the marketing channels in the March 2005 quarter, due to the implementation of VAT.

As a result, Glaxo is likely to see a 10 per cent y-o-y decline in sales and its operating profit could dip by 15 per cent in the June 2006 quarter.

In contrast, generic players are expected to benefit from prices in several product categories showing signs of stabilising, after several quarters of downward pressure in the key US generics markets.

Indian players like Ranbaxy are also likely to benefit from the 180-day exclusivity for the 80-mg dosage for Simvastatin, after the expiry of Merck's patent for Zocor.

Dr Reddy's, which supplies authorised generics for Merck, would also gain from this opportunity. Another growth provider for generic players would be from recent acquisitions like Dr Reddy's betapharm and Ranbaxy's Terapia.

With contributions from Shobhana Subramanian and Amriteshwar Mathur