ICICI Bank: Insipid numbers

Weak net interest margins, lower growth in fee income and higher provisioning impact March results.

It's been a disappointing end to FY07 for ICICI Bank, with the March quarterly numbers being lower than expectations. The earnings at Rs 825 crore reflect a sequential fall of 9 per cent and an annual rise of just 4 per cent, despite net exceptional gains of Rs 260 crore. This is due to the weak net interest margins (NIMs), lower growth in fee income and higher provisioning.

The lower proportion of low cost deposits during the quarter (22 per cent) compared with the previous quarter (24 per cent), amid a difficult interest-rate environment where the cost of both retail and wholesale money went up sharply, resulted in a lower NIM of 2.2 per cent despite the continued growth in high risk, high yield assets.

The bank's fee income grew at just 13 per cent sequentially, a slowdown from the previous quarters, and trailed the asset growth in the March 2007 quarter. With both the asset prices and interest rates up, the bank has been disbursing home loans at a lower pace and such loans have fallen by about 10 per cent y-o-y.

Moreover, provisioning is on the rise driven by the weakness in retail assets and retail non-performing loans (NPLs) were up 22 per cent sequentially. With over half of the retail loans not having a collateral on a six-month lag, the NPLs on credit cards and personal loans are running at 13 per cent.

Looking ahead, NIMs are unlikely to improve in the near future given the continued high cost of borrowings. However, the fee incomes could be stronger driven by corporate activity both at home and overseas.

The bank plans to raise Rs 20,000 crore through an equity issue. While the amount may seem large, it is a fact that despite a trying interest rate environment, the Indian banks are attracting good valuations in terms of price-earnings multiples when compared with their peers in Asia, because of the growth potential.

For the first time, the earnings yield of many private banks today is less than the short-term incremental cost of borrowings, which is around 9.5-10 per cent.

So the issue can be earnings accretive if priced attractively at around Rs 925 levels. After the 7 per cent correction to Rs 866, the ICICI Bank trades at just 3.2 times FY07 book value and should be an outperformer.

HLL: Expectations belied

The street seems to have expected more from Hindustan Lever's March quarter numbers as the stock tanked 4.7 per cent to Rs 199 in Monday's trading. The investors probably expected better sales growth in the personal products segment, which accounts for one-fourth of the company's total sales.

Besides, they would have been disappointed with the overall PBIDT (profit before interest, depreciation and tax) margin for the quarter, which was 22 basis points lower at 12.73 per cent, pulled down to an extent by stronger exports, which typically fetch lower margins.

The sales of health and personal care segment at Rs 2251.69 crore are up be a mere 10 per cent y-o-y and marginally more if adjusted for the discontinued businesses. This segment normally commands good margins.

The margins for personal products at 24.6 per cent were reasonably good. The sales of soaps and detergents grew at 9.5 per cent y-o-y, with a 12 per cent PBIT margin.

Categories such as beverages have posted fairly good y-o-y sales growth of 16.6 per cent, with margins of 15 per cent. The net profit before exceptional items was up 13.58 per cent at Rs 333.86 crore.

The raw material costs however continue to eat into margins. They were up 100 basis points at 55.5 per cent for the March 2007 quarter and HLL seems unable to pass on the entire cost to customers in a highly competitive environment.

The company has taken some price increases, but they have obviously not been enough. HLL needs to continuously spend on advertising and promotions to push its sales up.

The ad spends as a percentage of sales, which had moderated in the December quarter, are up 30 basis points y-o-y at 11.2 per cent. At the current price, the HLL stock trades at 25 times estimated CY07 earnings and is expensive given that earnings growth is unlikely to grow beyond 17-18 per cent.