HDFC: Just as expected

Bad loans rise at HDFC

HDFC's results have been distinguished by their utter predictability, and the first quarter performance did not disappoint in this regard.

As usual, approvals have increased by 30 per cent, and disbursements have gone up by 28 per cent. Approvals and disbursements grew at 30 per cent and 28 per cent, respectively, both in the last quarter and in FY 2005 as a whole.

There are other similarities. HDFC's loan portfolio grew at 29 per cent in the first quarter, again at the same rate as it grew last year. Profit after tax rose 21 per cent in Q1, compared with 22 per cent in FY05.

The increase in total assets, on a y-o-y basis, was 26 per cent in Q1, the same rate of growth as in FY05. What's more, the HDFC management has said the net interest margin has been maintained at 2.17 per cent, the same as in FY05.

Net interest income has increased by 48 per cent on a y-o-y basis. But while growth has been maintained, there has been a sharp rise in non-performing assets.

As at end-March this year, under the 90-day overdue norm, NPAs amounted to 1.10 per cent, and 0.84 per cent under the six-month overdue norms. As on June 30, 2005, NPAs under the 90-day norm were 1.74 per cent, while they were 1.26 per cent under the six-month past due norms.

At Rs 890, the stock quotes at 5.4 times book value, which is a very high valuation.

P&G Hygiene & Healthcare

Procter & Gamble Hygiene and Health Care (PGHHC) has hived off its detergents manufacturing business at about five times ( excluding the valuations given to inventory) annualised 9-month post tax profit to Proctor & Gamble Home Products.

The low multiple is because, for PGHHC, the contract manufacturing division has been one of low margins ""- segment profit margins declined 199 basis points to 4.69 per cent in the first nine months of its financial year ended June 05.

Margins of this business have been affected largely owing to surging prices of LAB and this was also reflected in the overhead consumption of raw and packaging materials expanding 51.3 per cent in the first nine months of the company's financial year.

Similar pressures were also seen in the March quarter and it resulted in the segment operating margins of the contract manufacturing division dipping 204 basis points to 4.73 per cent.

Also, this deal would enable the company to free up capital and enable it to focus on more high margin businesses such as sanitary napkins, throat lozenges and ointments. For the nine months to March 31, 2005, the margin for this business was as high as 30 per cent.

However, margins have been coming down""""they were 18.3 per cent in the March quarter. As a result, although top line growth for the health and hygiene business was 16.8 per cent y-o-y in the March quarter, profits were lower by 22 per cent.

Nevertheless, analysts expect the sale of its contract business and using the proceeds in its health and hygiene business would help the company get better valuation on the street "" currently, this stock trades 12-month trailing earnings at about 24 times compared with a discounting of 30 times for its peers.

Jindal Stainless

Jindal Stainless has reported a 32.76 per cent growth in its profit before tax to Rs 94.69 crore in the June quarter, on the back of a 32.43 per cent growth in net sales.

Despite the improved sales performance in the last quarter, domestic sales dipped 11 per cent to Rs 519.85 crore and senior management highlighted that they had expanded overseas sales owing to better realisations there.

Like earlier quarters, raw material costs have jumped in the June quarter "" it rose 36.6 per cent to Rs 534.9 crore in the last quarter and that was largely owing to higher prices of nickel and ferro chrome.

Also, as a percentage of net sales, raw materials rose 190 basis points to 62.44 per cent in the June quarter. Stainless steel prices, however, were higher by about 8.5 per cent on a y-o-y basis in the last quarter.

Apart from raw materials, other input costs such as power & fuel expanded 34.8 per cent on a y-o-y basis in the June quarter and staff expenditure rose 28.7 per cent.

A larger turnover helped operating profit expand 23.86 per cent to Rs 133.64 crore in the June quarter, but higher input costs led operating profit margins to shrink 107 basis points to 15.6 per cent.

The stock has underperformed the Sensex over the last one month. The company expects to complete its ferro chrome project over the next few months and this should help them manage key costs better.

With contributions from Amriteshwar Mathur