Another rate rise signal

Incremental C-D ratio has zoomed in recent months.

If current trends in deposits and advances continue, banks will have to raise interest rates sooner rather than later. For the month between August 6 and September 3 (the latest date for which Reserve Bank of India data are available), bank deposits rose by Rs 6,671 crore, while credit expanded by Rs 19,211 crore.

That's an incremental credit-deposit ratio of 288 per cent. But one month may be too short a period for a firm trend. In the previous month (between July 9 and August 6) the incremental credit-deposit ratio was 71 per cent.

And for the period June 11 to July 9, the incremental credit-deposit ratio was 78 per cent. Taking the total period between June 11 and September 3, the incremental credit-deposit ratio works out to 110.4 per cent, mainly because of the explosive credit growth in the last month on the one hand, while deposit growth too was tepid in August. The reason why interest rates are rising is obvious from these figures. Remember also that the "busy season", with its higher credit growth, is still before us.

The data stand out even more clearly when it's contrasted with the situation last year. In 2003, for the period August 8 to September 5, bank deposits rose by Rs 18,127 crore, while credit growth was Rs 4,229 crore""the incremental credit-deposit ratio was thus a mere 23 per cent. For the three month period June 13 to September 5, this ratio was a trifling 6.5 per cent.

Polymer prices

The price cuts for polymer products announced by Reliance Industries Limited (RIL) have been greater than the drop in international prices witnessed since the first week of September.

Reliance had earlier hiked polymer prices with effect from August 28, 2004 due to surging input costs. And hopes of a revival in demand from large domestic users after the latest price cut has helped the RIL stock gain around 1 per cent during Tuesday trading.

Analysts point out that international polyethylene prices ( excluding freight, insurance and allied costs) have dropped merely around 0.64 per cent since the first week of September vis-a""vis a reduction of 3.1 per cent announced by RIL.

A similar situation has been witnessed in polypropylene where global prices have fallen around 0.84 per cent while the domestic petrochemical giant has lowered prices by 3.24 per cent.

A senior Reliance official pointed out , " Reliance has taken these proactive measures to support the domestic industry in spite of the unprecedented rise in the costs of the input materials."

Meanwhile RIL has made several submissions to the government to reduce duty on its key inputs like crude oil and naphtha from 10 per cent to 5 per cent in a bid to lower its costs.

Aztec Software's Disha acquisition

Aztec Software's acquisition of Disha Technologies sent its scrip soaring by 12 per cent on Monday. One wouldn't have expected less in the midst of a mid-cap rally, but it's important to note that Aztec had already run-up quite a bit.

Since May 18, it has gained around 190 per cent, making it the fourth best performing stock at the NSE for the period. Before the acquisition announcement, the stock had already gained 161 per cent. In fact, because of the huge rise in the stock, it's now in the trade-to-trade segment to curb speculation.

Even with the trade-to-trade settlement, volumes continue to be high, indicating immense interest for the scrip. But, as is the case with many mid-cap and small-cap stocks, it may be time for a reality check. Based on estimated FY05 earnings, Aztec trades at a rather rich PE of around 17 times.

This excludes the impact of the acquisition, since the profit figure of Disha Technologies is not available. In any case, analysts say that the acquisition is expected to have only a marginal impact on the FY05 EPS, since the deal also involves some equity dilution.

Disha Technologies, which is in the software product testing space, complements Aztec, which is a software product development company. But benefits from the acquisition, in terms of accretion to EPS, is expected to kick-in only FY06 onwards.

Importantly, analysts point out that the FY05 EPS is well priced in and a further rise in the stock price will depend on growth prospects in FY06. It's doubtful that the mid-cap rally will sustain till the time that information is available.

With contributions by Amriteshwar Mathur and Mobis Philipose