ONGC posts decent growth, OMCs disappoint

RESULTS REVIEW: FEBRUARY 2006

 Gross realisations (prior to the subsidy) were pegged at $58 per barrel in the last quarter, about 30 per cent higher on a y-o-y basis, point out analysts. The company's gross realisations were $ 63 per barrel in Q2 FY 06.
 

However, the subsidy burden for the company ballooned to Rs 2843.17 crore in the December quarter as compared to Rs 1332.02 crore a year earlier. The company had borne a subsidy burden of Rs 4,100 crore in the entire FY 05.

Also, the company's production of oil was lacklustre in the last quarter on a y-o-y basis, due to the steps still being taken to ensure normal production, after the recent fire at Bombay High. As a result, ONGC's crude oil production was approximately 6.4 million tonnes in Q3 FY06 as compared to 7.1 million tonnes a year earlier. Nevertheless, a larger turnover helped the company's operating profit margin grow 707 basis points y-o-y to 59 per cent in Q3 FY06.

 Going forward, the company's oil production is expected to improve given its planned expansion in Syria and Brazil, and also the efforts already taken to restore output at Bombay High.  However, ONGC's ability to leverage strong crude prices is expected to be hit once again by the subsidy burden. The stock appears reasonably valued at about 8.7 times estimated FY06 earnings.  BHEL
Strong sales and profit growth  Bhel's results for the December 2005 quarter have beaten the streets' expectations. 

BHEL
(Rs crore)	Q3FY06	Q3FY05	% change
Net sales	3326.7	2286.6	45.5
Other Income	118.7	99.9	18.9
Operating profit	602.9	353	70.8
OPM (%)	18.1	15.4	270bps
Net profit	423.2	237.4	78.3
NPM (%)	12.7	10.4	230bps
EPS	17.3	9.7	78.2
Trailing 12 month PE at Rs 1843			32.3

 That's because the company's operating profit grew by 70.79 per cent y-o-y in Q3 FY06 to Rs 602.9 crore.

With increasing investments in power generation capacities over the past several quarters, Bhel's power division saw its revenues grew a huge 55 per cent y-o-y to Rs 2751.8 crore in the last quarter. In contrast, in the industry division, revenues grew at a slower pace of 15.51 per cent to Rs 956.8 crore.

During the quarter, the company commissioned the first of four 150-MW gas turbine generator in Libya and received the Indian government's approval to set up a 1,000-MW plant in Sudan. It also signed a technology transfer agreement with Alstom, France to manufacture large boilers, which will enable it to take up 800 MW projects.

In Q3 FY06, Bhel's revenues grew by 45.5 per cent y-o-y to Rs 3326.7 crore, but its raw material costs went up by 51.9 per cent. Analysts say that despite lower steel prices during the quarter, higher non-ferrous metal prices led to this rise. However, a larger turnover helped BHEL's operating profit margins rise by 269 basis points to 18.12 per cent over December 2004 quarter.

 Its order book stood at Rs 33,800 crore in Q3 FY06, up about 6.6 per cent. Going forward, the company will need a better control on costs to maintain margins.  The stock trades at about 22 times FY07 earnings, a fair valuation considering the growth potential of the company in the medium term  Punjab National bank
Net interest margin improves  PNB has reported one more quarter of robust growth. The bank's core business performance has been better than analyst expectations. Net interest margin (NIM) has improved. Unlike last quarter, the bank showed impressive growth in its fee based income. 

PUNJAB NATIONAL BANK
(Rs crore)	Q3FY06	Q3FY05	% change
Net Interest income (NII)	1207.4	1029.5	17.3
NIM (%)	4.0	3.9	-
Other Income	244.5	248	-1.4
Cost to income Ratio (%)	62.2	66.3	-
Operating profit	548.4	430.8	0.7
OPM (%)	37.8	33.7	-
Net Profit	370.4	314.3	17.9
NPM (%)	25.5	24.6	-
EPS	11.8	11.9	-0.8
Price to Book Value for FY06E	-	-	1.6x

 However, capital (treasury) gains were lower due to jittery bond markets. The company's cost of deposits declined as the bank increased the proportion of low cost current and savings deposits. The banks' loan book has grown an impressive 31 per cent year-on year (y-o-y) coupled with improved yields. Net NPAs are down to 0.25 per cent from 0.3 per cent in Q2FY06.

Net interest income increased by 17.3 per cent y-o-y at Rs 1207 crore. Net interest margin improved by 16 bps at 4.02 per cent

Other income declined marginally mainly due to a 27.4 per cent decline in capital gains which stood at Rs 82 crore

Operating profit increased by 27 per cent due to better control over costs. Operating margin improved by 410 bps as cost to income ratio declined by a similar amount and stands at 62.2 per cent

Net profit grew at a lower rate of 18 per cent due to higher provisioning. Thus net margins improved marginally by 90 bps at 25.5 per cent

 At Rs 449, the stock trades at a price to adjusted book value of 1.3 times for FY07E. Analysts are upbeat about the stock and are comfortable with the valuation considering that the bank has one of the highest NIMs and lowest net NPAs in the industry.  The management's focus on improving the core business and fee based income is also an encouraging sign  VSNL
Disappointing revenue growth  VSNL's performance for the December quarter was quite disappointing. Its operating revenues went up only 5 per cent over September 2005 quarter to Rs 977.5 crore. 

VSNL
(Rs crore)	Q3FY06	Q2FY06	% change
Net sales	977.5	929.5	5.16
Other income	43.7	31.7	37.85
Interest on tax refund	54.3	-	-
Operating Profit	205.1	191.0	7.38
OPM (%)	20.98	20.55	43 bps
Adjusted profit	95.7	83.5	14.61
EPS (Rs)	3.19	-	-
P/E (12 months)			14.9x

 The growth has come due to a modest volume increases in the enterprise segment.

Operating profit increased 7.38 q-o-q to Rs 205.1 crore. While the operating profit margin improved a small 43 basis points to 20.98 per cent, due to lower network expenses, pricing p ressures have affected VSNL's profitability.

The company is focussing on the enterprise segment where the volume growth is almost 100 per cent per annum, though on a low base. However, given the intense competition in this space, margins are under some pressure.

The international and domestic long distance segments are estimated to have seen reasonably good volume growth at 9 per cent q-o-q and 25 per cent q-o-q respectively, in the quarter but regulatory and competitive pressures are expected to have put pressure on margins.

During the quarter, the SEA-ME-WE-4 transcontinental cable system spanning 19,000 kms was made operational, which will enhance VSNL's international bandwidth capacities, from India to Middle East and Europe. VSNL is the network administrator for the system.

VSNL also completed the acquisition of Tata Power's broadband subsidiary Tata Power Broadband, which has now been renamed as VSNL Broadband. This company has metropolitan area network (MAN) in the cities of Mumbai (650 kms) and Pune (150 kms).

 The retail broadband business is too small at present to impact VSNL's profitability. After adjusting for extraordinary items, the net profit grew just 14.61 per cent q-o-q in the December quarter.  VSNL will take time to fully exploit the advantages of its international businesses, which it has acquired, through Tyco Global and Teleglobe. At the current price of Rs 370, the stock trades at 22 times estimated FY07 earnings, which is expensive considering the slower growth rates.  Hindalco
Operating profit down due to higher input cost, shutdown  The Aditya Birla Group non-ferrous metals major, Hindalco, saw a 9.8 per cent y-o-y decline in its operating profit for the December FY06 quarter to Rs 583 crore. 

HINDALCO
(Rs crore)	DQFY06	DQFY05	% change
Net sales	2873.7	2490.1	15.41
Operating profit	583	646.5	-9.82
OPM (%)	20.29	25.96	-
Net profit	300.6	347.3	-13.45
EPS (Rs)	3	4	-
P/E (12 months)			13.61x

 Operating margin also fell to 20.3 per cent as compared to 25.96 per cent in corresponding previous quarter. This was despite a 15.4 per cent increase in net sales to Rs 2873.7 crore. The bottomline inched down by 13.45 per cent to Rs 300.6 crore.

Analysts attribute this to a lacklustre performance in the copper division. Smelter operations were hampered by a 25 day planned shutdown in smelter 1, an 18 day planned shutdown in smelter 2 and a 19 day shutdown in smelter 3, due to siphon leakage. Copper cathode production fell about 18.3 per cent to 44,236 tonne. The copper division posted a loss of Rs 84.5 crore as compared to a profit of Rs 79 crore in corresponding previous quarter.

High costs for some key inputs is also a reason for the fall in performance. Hindalco saw backwardation losses due to lower production volumes while LME price continued to move upwards.

Nevertheless, aluminium division posted a 17.1 per cent growth in profit to Rs 542.1 crore. This was on back of improved output, improved realisations of both alumina and aluminium and focus on higher value products. The value added products revenues rose 18 per cent and contributed 56 per cent to the total sales. This was despite rise in cost of major inputs like coal, caustic soda and furnace oil. Energy savings from the captive power plant at the Hirakud smelter helped.

 Research reports predict that the worst is over for Hindalco's copper business. The copper business' performance is expected to bounce back from Q4, thus driving earnings growth for FY07.  Moreover, the company is pursuing several large-sized expansion projects in alumina and aluminium amounting to a capex of about Rs 12000 crore. All these projects are on track. It continues to pursue the MoUs it had signed with the governments of Orissa and Jharkhand for greenfield projects in these states. Each of these projects are 3-4 years away from commissioning.  Asian Paints
Modest revenue and profit growth  The leader in paints, Asian Paints, with an overall market share of about 30 per cent, has painted a 10.5 per cent y-o-y growth in standalone net sales to Rs 640.63 crore for the quarter ended December FY06. 

ASIAN PAINTS (STANDALONE)
(Rs crore)	DQFY06	DQFY05	% change
Net sales	640.63	579.73	10.5
Operating profit	97.3	90.25	7.81
OPM (%)	15.19	15.57	-
Net profit	60.63	50.11	20.99
EPS (Rs)	6.36	5.22	-
P/E (12 months)			26.34x

 On back of this, the net profit has risen 21 per cent to Rs 60.63 crore. The company's revenues have been driven by a 10.9 per cent growth in the paints business, which accounts for 95 per cent of the total. Revenues and profits from the other businesses (phthalic anhydride and pentaerythritol) have seen a decline over the period.

A growth of 7.8 per cent was seen in operating profit to Rs 97.30 crore, while operating margins have slided marginally to 15.19 per cent from 15.57 per cent.

Good growth is expected in both, the decorative and industrial paints, in India and the Middle East region. The decorative segment offers good growth potential with a gradual shift of people to branded paints, on back of rising incomes. Asian Paints, the leader in decorative paints is set to benefit from the construction and housing boom, tie-up with contractors value-added services.

Industrial paints, where Asian Paints currently ranks third in the country, are seeing rapid growth due to the auto and consumer durable sectors. The company is catching up rapidly with launch of new products. The infrastructure boom is opening up paint applications like signboards.

The paints industry is expected to grow at 15 per cent plus for FY06, even as raw material prices remain an area of concern.

On a consolidated basis, Asian Paints has posted a growth of 10.9 per cent to Rs 818.16 crore in December quarter, while net profit has grown by 7.93 per cent to Rs 62.67 crore. Asian PPG, the company's joint venture for automative coatings has been doing well.

 Its foreign subsidiaries, which contribute about 17 per cent of the total revenues, have not grown as fast as the company's domestic business. The company has good presence in over 22 countries through the subsidiary Berger International, which faces high material costs. Management expects better growth in internationa business by FY08.  Mahindra & Mahindra
Lower raw mat cost helps margins  M&M's total revenues increased by 23 per cent y-o-y to Rs 2,186 crore during the December 2005 quarter. 

M&M
(Rs crore)	Q3FY06	Q3FY05	%change
Net Sales	2186.16	1772.28	23.35
Other Income	40.28	22.23	81.2
Operating Profit	263.08	211.65	24.3
OPM (%)	12.1	11.9	20 bp
Net profit	233.46	133.19	75.28
NPM (%)	10.68	7.52	316 bps
EPS(Rs)	9.5	5.42	-
P/E (12 months)			18.9x

 The company benefited from a 33.5 per cent y-o-y rise in tractor sales, due to strong monsoons this financial year. The growth in the automotive segment was more subdued at 17 per cent y-o-y.

Operating profit increased by 24 per cent y-o-y to Rs 263 crore in the December 200 5 quarter. This was because the company managed to keep raw material costs under control thanks to lower steel prices. As a result the ratio of raw material to sales was down by 270 basis points at 68 per cent. But other expenditure increased to 13.3 per cent of sales, compared with 10.6 per cent in the December 2004 quarter. This resulted in the operating profit margin improving by just 20 basis points y-o-y to 12.1 per cent.

Segment profit margin (before exceptional items) for the farm equipment segment was at 12.4 per cent compared with 11.9 per cent for the automotive division. The profitability of the automotive segment has improved in the last three quarters, due to price hikes and a better product mix. The contribution of the high-end Scorpio models has resulted in an improvement in the topline of auto division. Farm division segment profit margin too has been improving, with the company getting more operating leverage on higher volumes.

The company's net profit increased by 75.28 per cent to Rs 233.46 crore in the December 2005 quarter. Its other income went up by 81.2 per cent to Rs 40.28 crore in Q3 FY06.

 In the December quarter, tractor volumes were up 26 per cent y-o-y compared with the industry growth of 16 per cent. At the current price of Rs 557, the stock is trades at 12.4 times estimated EPS FY07 consolidated earnings, and is not too expensive.  Suzlon
Spectacular profit growth  Suzlon Energy had a great quarter during December 2005. Its income from operations increased by a huge 207 per cent y-o-y to Rs 871 crore, with operating profit rising 255 per cent to Rs 187 crore. 

SUZLON
(Rs crore)	Q3FY06	Q2FY06	% change
Net Sales	871.04	283.97	206.74
Other Income	10.8	6.48	66.67
Operating Profit	187.09	52.66	255.28
OPM (%)	21.48	18.54	293 bps
Net profit	161.94	37.28	334.39
NPM (%)	18.59	13.13	546 bps
EPS(Rs)	5.68	1.41	-

During the quarter, the company managed to keep operational costs under control and as a result, operating profit margin improved by 293 basis points to 21.48 per cent. Raw material costs increased only 108 per cent, while other operating expenditure went up by 143 per cent.

With a low depreciation and interest burden, Suzlon's net profit has i ncreased by 334 per cent y-o-y to Rs 161.94 during the December 2005 quarter.

Its order book stood at 4,232 crore at the end of December 2005 quarter. Of this, domestic orders amounted to Rs 1,613 crore and export orders were at Rs 2,619 crore.

Exports revenues stood at Rs 59 crore, contributing 7 per cent to total revenues. Going forward, contribution of exports is likely to increase.

Suzlon new bagged a new order of setting up 157 MW of power in North America in January to deliver 75 2.1 MW units in 2006 and 2007.

During the quarter, the company's wind turbine generator manufacturing facility in China received requisite licenses from government authorities, which will add 600 MW of capacity. Its US facility will also add 600 MW capacity. Both the China and the US plants are expected to be operational in Q2 FY07. It added the high performance Kilowatt Series S.52600 kW wind turbine to its product basket in the December 2005 quarter.

 There is a trend across the world to use non-conventional forms of energy, and being one of the major wind po wer generation companies, Suzlon is likely to benefit. The stock has almost doubled since its listing in October, but seems fully priced at current levels of Rs 1,060.  Hero Honda
Decent sales growth, but trails behind competition  Hero Honda's financial performance at the topline has not been as good as its competitors during the December 2005 quarter. Its revenues grew by 15.6 per cent y-o-y to Rs 2,314.77 crore in the December 2005 quarter. 

HERO HONDA
(Rs crore)	Q3FY06	Q3FY05	%change
Net Sales	2314.77	2001.88	15.63
Other Income	36	41	-12.2
Operating Profit	378.05	310	21.95
OPM (%)	16.3	15.4	90 bps
PAT	261.78	218.93	19.57
NPM (%)	11.31	10.94	37 bps
EPS	13.11	10.96	-

 Compared to Hero Honda's 23 per cent y-o-y growth in the September 2005 quarter and competitor Bajaj Auto's sales growth of 25 per cent in Q3 FY06, this growth is low and there seems to be some difficulty in scaling up from these levels.

But its operating profit growth was up a strong 22 per cent y-o-y to Rs 378 crore. This was due to a lower raw material to sales ratio of 69.18 per cent compared with 70.9 per cent in Q3 FY05, helped by lower steel prices during the quarter. Operating profit margin too expanded by about 90 basis points to 16.3 per cent.

Hero Honda had better per unit realisations, which went up from Rs 28,113 a year ago to Rs 28,996 in the December 2005 quarter, which helped in better profitability, despite a volume growth of just 12.1 per cent to 7.98 lakh units.

Its operating margin had dipped slightly in the September quarter on a y-o-y basis but had improved sequentially. In the December 2005 quarter, margins have improved both sequentially and over previous corresponding period of last year. Net profit growth at 19.57 per cent to Rs 261.78 crore, which was lower as compared to the operating profit growth in the December quarter.

 At around Rs 850, the Hero Honda stock trades at 17.1 times estimated 2006-07 earn ings. On the other hand, Bajaj Auto trades at around 20 times FY07 EPS. The gap is likely to remain given Bajaj Auto's better topline performance and better margins.  State Bank of India
IMD takes a toll  State Bank of India's results for Q3FY06 have been below expectations, but that was partly because of the repatriation of India Millennium Deposits during the period. 

SBI
(Rs crore)	Q3FY06	Q3FY05	%change
Interest Income	9558.15	8029	19.05
Interest Expended	5338.27	4368.99	22.19
Other Income	1840.47	2238	-17.76
Net Interest Income	4219.88	3660	15.3
Net Interest Margin (%)	3.0	3.1	-
Profit before Provisions	2599.65	3389.97	-23.31
Net Profit	1115.19	1099.35	1.44
EPS	21.19	20.89	-
P/Book@			1.2X FY06

The bank's operating profit at Rs 2,599.65 crore has fallen by 2.3 per cent y-o-y, impacted by higher borrowing costs which the bank had to resort to due to the outflow on account of the IMD deposits of Rs 25,000 crore.

The reported interest income in the quarter grew at 15.3 per cent y-o-y. However after adjusting for a tax refund of Rs 950 crore and an RBI refund of Rs 560 crore, the net interest income fell 18 per cent yoy.

The interest expended went up by 22 per cent y-o-y. In particular, the interest paid on deposits has risen 18 per cent even though the cost of deposits actually came down to 4.52 per cent from 4.74 per cent in Q3FY05, Other borrowings cost doubled to Rs 369 crore.

The core net interest margin (NIM) for Q3FY06 fell to 3 per cent from 3.1 per cent in Q3FY05.

SBI's other income declined sharply by 18 per cent y-o-y to Rs 1840 crore, and one reason for this fall was an 86 per cent drop in profit on the sale of investments.

Its net profit increased by just 1.4 per cent y-o-y to Rs 1,115 crore. A writeback of loan-loss provisions of Rs 102.56 crore compared with a provision of Rs 791 crore in Q3FY05, and a reduction in other provisions have resulted in the bank posting a higher net profit.

 At the current price of Rs 857, the stock trades at a Price to Book multiple of 1.2 times FY06 and just 1 time FY07 expected book value, and i s attractively valued.  HP, BP, IOC
Hit by subsidy losses  Profitability of all oil marketing companies (OMCs) took a serious beating in the December quarter owing to high crude prices and higher subsidy losses. HPCL and BPCL reported operating losses of Rs 879.59 crore and Rs 910.4 crore, respectively while IOC saw a sharp drop of 86.65 per cent y-o-y in its operating profit to Rs 160.8 crore. 

HPCL
	31-Dec-05	31-Dec-04	%change
Net Sales	18260.99	16227.11	12.53
Other Income	50.35	101.18	-50.24
Expenditure	19140.58	15762.44	21.43
Operating profit	-879.59