Doing well

Higher net interest income drives growth in HDFC Bank

Perhaps the best indicator of HDFC Bank's performance in the fourth quarter of FY 2005 is the fact that diluted earnings per share improved to Rs 6.30 for the quarter, compared with Rs 5.60 in the December quarter, despite an 8 per cent rise in equity capital on account of the ADS issue.

Operating profit was up 42.4 per cent year-on-year and higher by 11.9 per cent compared to the third quarter. Net interest income drove revenues, increasing by 42.4 per cent y-o-y and 16.7 per cent on a sequential basis.

Fee income too has improved substantially y-o-y, although revenues from forex and derivatives was lower in Q4. As a percentage of total income, "other income" was around 20 per cent both in Q3 and Q4, FY 05, but well above the percentage a year ago.

Treasury income was never a key profit driver for HDFC Bank, and treasury losses have been more than offset by its wholesale and retail business.

During Q4, wholesale banking revenues were lower than in Q3, because Q3 included the float funds from IPOs, for which HDFC Bank was the collecting banker. Retail revenues rose 17.6 per cent sequentially, and margins too improved, because of upfront income from securitisation.

Spreads have risen to 3.9 per cent, also evident from the fact that interest expended as a percentage of interest earned went down to 40.7 per cent in Q4, compared with 43.5 per cent in the previous quarter.

During the fourth quarter the level of deposits actually fell, again because the float funds available from IPOs in Q3 were absent in Q4. The rise in outstanding advances over the period was funded by higher borrowing.

Of course, at 26 times FY05 earnings, HDFC Bank is expensive, but that hasn't stopped it outperforming the Bankex this year.

Hero Honda

Hero Honda's March quarter profit of Rs 207.1 crore was lower than consensus estimates, but it's not that the markets were taken completely by surprise. Some analysts had predicted a net profit as low as Rs 203.5 crore.

The company had run a discount of Rs 1001 on key brands during the March quarter, which coupled with rising input cost was expected to hit profitability.

Operating margin fell 190 basis points last quarter, more or less on expected lines. But interestingly, average realisations were down just 0.1 per cent, indicating that a better product mix made up for the discounts given.

The impact of the price discounts and rising input costs is better reflected in the company's operating profit per vehicle. Last quarter, this metric fell over 11 per cent to Rs 4278. For the whole year, it fell by 6.1 per cent, following the 10.6 per cent drop in FY04.

This means that operating profit per vehicle has fallen over 16.1 per cent sold in the past two years. Hero Honda's problems last fiscal began only in the second half.

In the first half, operating profit had risen 32.1 per cent, almost in line with the 35.3 per cent growth in the top line. In the second half, however, operating profit growth fell to 8.8 per cent, much lower than the 20.9 per cent increase in sales.

Hero Honda has withdrawn its price discounts, which effectively means a price increase of about 2-3 per cent. Yet, the pressure on margins is expected to continue, what with input cost pressures continuing.

With volume growth expected to be around 15 per cent, lower than the 26.6 per cent growth recorded last fiscal, earnings growth is estimated to be in single digits this fiscal. Given that background, the company's forward PE of around 12 times doesn't seem low.

Essar Steel

The key take away from Essar Steel's March quarter result is that the profitability of the steel industry is still very strong, thanks to buoyant domestic demand.

Essar Steel's profit before charges pertaining to earlier years and taxation has grown 287 per cent to Rs 453.3 crore in Q4. The stock was down about 2 per cent in Wednesday trading, but, prior to the declaration of the result, this stock had already run up about 29 per cent over the last two months.

Steel prices in the last quarter were about 8 per cent higher on a year-on-year basis. The company's strategy of expanding the share of value added products to about 35 per cent of sales volumes has helped net sales grow by 58 per cent in the last quarter.

However, cost of materials consumed has risen 37.3 per cent, largely due to higher prices of coke and iron ore. A larger turnover has helped operating profit grow 152 per cent to Rs 696.51 crore in the last quarter and operating profit margins have expanded 1350 basis points to 36.21 per cent.

Going forward, Essar Steel is working to enhance its capacity from 2.4m tonne to 3.6m tonnes later this year. In addition, it is looking to transform itself into an integrated steel player, in a bid to manage input costs better ""- the management has expressed its intention to acquire a 51 per cent stake in Hygrade Pellets and 100 per cent stake in Steel Corporation of Gujarat (SCGL) from Stemcor of UK.

If one were to use Essar Steel's results as a benchmark, other players such as Tata Steel and SAIL should report sharp growth in their March quarter profit.

With contributions from Mobis Philipose and Amriteshwar Mathur