Markets not inspired by numbers

Q3 RESULTS ANALYSIS

CORPORATION BANK
Fall in non-interest income drags profits down

Corporation Bank posted a lower-than-expected net profit of Rs 113.27 crore, a 25.39 per cent decline from the corresponding previous quarter. The main reasons for the fall in profits are the decrease in non-interest income, especially from sale of investments, and substantial rise in provisioning for bad debts to adhere to the 90-day rule. Net interest income, however, recorded an increase of 13.42 per cent to Rs 267.76 crore.

• Other income was 27 per cent lower primarily on account of lower profit from sale of investments which fell 55.9 per cent to Rs 45.2 crore.
• The next biggest contributor to other income - profit from exchange transactions (forex) - also suffered as a result of an appreciating currency, registering a sizeable fall to Rs 0.13 crore compared to Rs 7.49 crore in December 2002.
• The decline in profits was reinforced by the rise in provisioning for bad debts to Rs 58.75 crore from Rs 45 crore in the same quarter last year.
• The bank has complied with the 90-day norm (all banks need to comply with the norm by the end of this fiscal), resulting in an increase in provisions by Rs 16 crore. But for this, NPA provisioning for the quarter would have been lower at Rs 42.75 crore.
• Value of investments depreciated by Rs 14 crore this quarter.
• Return on equity dipped to 18.62 per cent in December 2003 compared to 20.36 last year on an annualised basis.

The bank's NPAs are lower compared to other public sector banks. What has come as a surprise this quarter is the sharp deterioration in the profit on sale of investments. The bank's ability to manage its treasury amid volatility in interest rates will be critical going forward. "We expect an EPS of Rs 32 for FY04 and Rs 36 for FY05," says an analyst with a domestic research house.

The stock currently trades at levels of Rs 259 with a trailing 12-month P/E of 8.6.

DIGITAL GLOBALSOFT
Business from HP drives revenues

Digital posted a 11.12 per cent growth in revenues to Rs 161.82 crore on a sequential basis. Net profits grew 11.48 per cent to Rs 35.55 crore as compared to Rs 31.89 crore in the previous quarter. Revenue growth was driven by business from HP, which accounted for 74 per cent of incremental revenues. More than half of the additional business from HP came via the Digital Contact Centre (DCC) business, revenues of which jumped 40.25 per cent sequentially to Rs 22.3 crore.

• The services business grew 8 per cent sequentially in the quarter to Rs 138.6 crore.
• The contact centre business saw a 40 per cent jump to Rs 22.3 crore over the previous quarter.
• Revenues from HP grew 9 per cent sequentially to Rs 121.9 crore while earnings from independent business showed a 15 per cent increase to Rs 32.4 crore.
• High offshore work (55 per cent to total revenues compared to 48 per cent in the previous quarter) and lower travel expenses led to a 90 basis points improvement in operating margin.
• Digital added 449 people during the quarter, raising its total headcount to 4,889.

Digital presently trades at less than 19 times FY04 earnings at Rs 785 on the BSE - which is at a premium to the buyout price (Rs 750) offered by HP. The P/E of the scrip is much lower than its peers and given HP's keenness to delist the shares, analysts expect the company to grant a hike in the buyout price, if investors ask for it through the reverse book-building process. Analysts say that a fair valuation of the stock should be around Rs 900.

MASTEK
Rise in operating margins bolsters bottomline

The Mastek group posted a 5.18 per cent growth in its sequential revenues in the December quarter to Rs 93.12 crore compared with a sequential revenue growth of 1.3 per cent in the September quarter. Net profit was up 35.26 per cent, bolstered by an improvement in operating margins from 6.12 per cent to 7.97 per cent. In the first two quarters (the company follows a July-June fiscal year) Mastek has managed to meet its earnings guidance set at the beginning of the year.

• Net margins were significantly higher at 4.4 per cent compared to 3.42 per cent in the last quarter. Still margins continue to hover low, reflecting pricing pressures.
• The company received a $50 million contract spread over 10 years. The order book increased 27 per cent sequentially to Rs 197 crore.
• Revenues from European operations grew by 15 per cent with new agreements signed with a few existing customers as well as new ones. Revenues from the US operations dropped 6 per cent due to execution delays. Presently, the US contributes 31 per cent while Europe contributes 52 per cent to the group's revenue.

Mastek had said in the beginning of the year that revenues this year would grow 21 per cent to around Rs 450 crore and net profit would fall 31 per cent to Rs 34.5 crore with the first half accounting for 40 per cent of revenues and 20 per cent of profit. Though this has been met, analysts feel that the company will face a daunting task in achieving its FY04 targets. "In order to meet its FY04 guidance, the company needs to show a 27 per cent sequential growth in revenues in the third and fourth quarters. Although it has managed to grow its order book, meeting these targets does not look very possible," says an analyst with a leading broking firm. The stock currently trades at around Rs 308 on the BSE at a P/E of around 13x. Analysts put an EPS target of Rs 18 for FY04.

HDFC
Rise in net interest income lifts earnings

HDFC continued to show linear growth in earnings this quarter, too. Net profit grew by 24.32 per cent to Rs 182.31 crore. The rise came on account of an increase in net interest income which increased 20.86 per cent y-o-y to Rs 269.91 crore.

• Interest earned remained flat at Rs 744.84 crore this year - a marginal increase of 1.69 per cent against the same quarter last year.
• Approvals recorded an increase of 29.8 per cent to Rs 3518.06 crore and disbursements registered an increase of 26.68 per cent to Rs 2874.88 crore in the third quarter compared to the same quarter last year. Approvals and disbursements both have shown consistent growth as seen in the last many quarters.
• HDFC's loan portfolio, inclusive of investment in preference shares, debentures and inter-corporate deposits for financing real estate, stood at Rs 1282 crore, higher by 11.67 per cent compared to the previous quarter.

Analysts reckon that there is nothing startling about the results. "HDFC has always maintained its stable rate of growth, devoid of any surprises. We estimate an EPS of Rs 34 for FY04 and Rs 40 for FY05," says an analyst with a domestic research house. The stock currently trades at a trailing 12-month P/E of 20.17 at price levels of Rs 644.

HERO HONDA
Operating margins surge on growing sales volume

Hero Honda witnessed a 14.92 per cent growth in revenues to Rs 1581.41 crore from Rs 1376.04 crore. The company witnessed a 26.6 per cent jump in volumes accruing from the favourable festive season. For the quarter, Hero Honda registered sales of 5,72,196 bikes as compared to 4,52,050 units in the same quarter last year. There continues to be a big difference between the growth rates in volumes and revenues because of a higher proportion of sales of entry-level bikes this year, thanks to the success of the CD Dawn.

• Operating margins improved slightly by about 50 basis points to 17.05 per cent due to rationalising of costs through working capital management, increasing manufacturing efficiency and growing sales volume.
• Other expenses fell 11.5 per cent to Rs 141.90 crore from the year ago period while staff costs increased by 16.5 per cent to Rs 60.66 crore.
• Other income increased sharply by 104.22 per cent to Rs 44.5 crore or 15 per cent of PBT. Analysts attribute this to the company selling off some of its long-term investments in the quarter.
• The company has announced a dividend of Rs 10 per share, which would involve a payout of Rs 225 crore (including dividend tax).

Hero Honda is trading at Rs 463, at a P/E of 14.05x. Analysts are upbeat about the future prospects of the company, although they feel that valuations are looking stretched. "Going forward, the company is looking to continue on the strong volume growth trail," says Ashish Jagnani, auto analyst at HDFC Securities. "However, the downside to the stock may be limited by the company's dividend policy (4.5 per cent based on Rs 20 dividend for the full year) which makes the stock attractive from a dividend-yield perspective," he adds. Analysts expect the company to show a full-year profit of around Rs 711 crore and put an EPS target of Rs 35.5 for FY04.

GUJARAT AMBUJA CEMENTS
Weak prices hit net

Gujarat Ambuja Cements performed better than expectations during the December quarter of FY04. The company recorded a 4 per cent rise in turnover to Rs 434.40 crore as compared to Rs 419.34 crore during the same period in FY03. However, net profit dipped marginally by 1.29 per cent to Rs 59.54 crore. Despite the fact that the company sold 2.55 million tonnes of cement during the December quarter against 2.30 million tonnes in the corresponding period last year, its performance was impacted by a weak prices and sluggish demand for much of 2003.

• Price realisation is down by 6 per cent in the December quarter of FY04 as compared to the same period in FY03.
• Total raw material costs rose 8 per cent to Rs 29.67 crore, freight and forwarding expenditure increased 16 per cent to Rs 88.59 crore and other expenditure jumped 12 per cent to Rs 94.78 crore.
• Operating profit declined by nearly 20 per cent to Rs 112.61 against Rs 140.45 in the previous year on account of lower sales realisation. Operating profit margin was at 25.92 per cent compared to 33.49 per cent.
• Interest costs came down to Rs 22.11 crore in Q2 FY04 against Rs 26.11 crore in Q2 FY03.
• Net margin was down to 13.71 per cent from 14.38 per cent in the corresponding quarter in the previous fiscal.
• Higher utilisation levels resulted in higher clinker production by 2 per cent at 2.33 million tonnes.

According to the company, demand has started picking up from December 2003. On the back of good demand, cement prices have also started moving up from the low levels seen in September 2003. According to analysts, the higher price trend is expected to continue, which will lead to better performances in the next two quarters. At a P/E of 22x on trailing 12-month EPS, the scrip is still considered attractive.