Equity dilution concerns

HDFC Bank has returned handsome results

Bond yields may rise, banks may have to book losses on their investments, and competition may hot up in the retail sector, but guess how much HDFC Bank's profits have risen this quarter, year-on-year? Thirty per cent, of course, more or less the same rate at which they have been rising every quarter for several years.

"Core" net interest income, adjusted for one-off items, was up 33 per cent, and was the chief driver of profits. Interest earned on loans and advances rose 47 per cent, year-on-year, while interest earned on the investment portfolio declined, implying a lower level of investments.

Credit growth was driven by retail lending, which rose by 68.7 per cent. But the surprise was that "other income" too was higher (thanks to a 71 per cent rise in fees and commissions), contributing handsomely to the bottomline.

HDFC Bank had a loss on sale of investments in Q2, 2003, and the loss on this account in the last quarter was only slightly higher.

HDFC Bank's low duration of investments and the fact that treasury income was never the key profit driver are factors favourable to the bank at this critical time for the industry, when the cycle is turning.

The bank's net interest margin has remained steady while its retail growth and growth in low-cost deposits continue, and it has no NPA problem.

While these factors, and HDFC Bank's steady 30 per cent rise in earnings should ensure that the bank will continue to remain a favourite among investors despite its relatively high valuation, the equity dilution from the proposed capital issue will weigh on the scrip till such time as there's more clarity on the issue.

IBP: Subsidies hit bottomline

The cost of oil subsidies is finally showing up in retailing companies' bottomlines. IBP, the subsidiary of Indian Oil Corporation, has turned in a loss for the second consecutive quarter, despite sales going up as much as 31 per cent y-o-y. In short, the more IBP sells, the more it loses.

Sales are down sequentially because of the trucker's strike and lower demand post-elections. EBITDA margins this quarter are a negative 2 per cent compared with plus 3 per cent in Q204.

IBP's losses are the result of the under-recovery on subsidies of LPG and

SKO (superior kerosene oil). The total loss on this account in Q205 has been of the order of Rs 134 crore, of which the upstream companies paid Rs 44 crore, leaving a net loss of Rs 89.6 crore. In Q1FY05, the net loss posted was Rs 63 crore.

The losses have been kept in check since IBP's LPG and SKO volumes contribute just 11 per cent of total volumes, the remainder coming from diesel (74%) and petrol (15%).

Retail margins for diesel in Q2 are estimated to have between 10-15 paise per litre while for petrol they have been approximately 1.30 paise per litre.

The margins on these products continued to be positive in the last quarter, the result of retail prices having been raised in August. The company's expenses have gone up by 38 per cent y-o-y since raw material expenses are up 41 per cent. Of course, IBP's problem of being a pure retailer will be addressed when it's merged with IOC.

Sun Pharmaceuticals

Sun Pharmaceuticals reported a 20 per cent growth in net profit last quarter, on the back of a 16 per cent growth in revenues. The results were taken well by the markets, with the Sun Pharma stock rising by over 5 per cent on Thursday.

Net sales of the company grew 8.8 per cent to Rs 266.6 crore, aided by a 10 per cent growth in domestic sales - export sales grew by less than 5 per cent.

Domestic sales grew thanks to improved demand for the company's repertoire of medications in segments such as psychiatry, neurology, cardiology and gastroenterology.

But much of the other income is operating income accruing from Sun Pharmaceutical Industries (SPI), a partnership firm engaged in manufacture of pharmaceutical formulations. Other income rose 67 per cent last quarter, resulting in an over 16 per cent growth in total revenues. Operating margins, however, were flat mainly because of higher R&D costs.

With the new patent regime just a few months away, research and development costs of the company jumped 31.6 per cent last quarter. Going forward, exports are expected to grow aggressively with the newly built facility near Dhaka, Bangladesh being commissioned recently. The company has also recently acquired three niche brands from the San Diego-based Women's First Healthcare, which should also help drive its overseas sales.

With contributions by Shobhana Subramaniun and Amriteshwar Mathur