ICICI Bank: Slackening pace?

Higher provisions squeeze spectacular operating profit growth at ICICI Bank.

ICICI Bank's operating profit for the first quarter of FY 06 has risen by a colossal 74.6 per cent, compared to the first quarter of FY 05, but growth in net profit has been relatively muted, at 23 per cent.

Operating profit growth has come from all sources. Out of the Rs 562 crore rise in core operating income (excluding treasury), Rs 220 crore was contributed by higher net interest income, Rs 240 crore by higher fees and Rs 102 crore by other non-interest income.

That's in line with earlier trends at the bank""-in FY05 too, fee and other non-interest income contributed more to the rise in profits than net interest income.

The percentage of fees to income moved up from 34.7 to 35.1. Treasury income too was higher by Rs 90 crore. Net interest margin was slightly higher, and the cost to income ratio was substantially lower, swelling operating profits.

The hit to the bottomline came from higher provisions, which rose by Rs 250 crore, largely due to amortisation of premium on government securities.

Net NPAs too have fallen slightly to 1.9 per cent from 2 per cent on March 31 this year, while net restructured assets also declined marginally.

The bank's deposits grew by a phenomenal 70 per cent y-o-y, compared to 15 per cent for the banking system as a whole. Advances rose by 40 per cent.

The ICICI Bank scrip has moved up sharply in the last few days. But at around 3 times end-June book value, and with very high income growth, that is unlikely to be perceived as overvalued.

Tisco

The key focus of TISCO's June quarter results was whether the recent price cuts have led to a slowdown in profit growth. TISCO has reported a 15.6 per cent y-o-y growth in its profit before tax and exceptional items to Rs 1413.75 crore for the June quarter, despite net sales expanding 9.48 per cent.

The volume of steel sold by the company declined 3.27 per cent in the last quarter.

However, the company has been enhancing the proportion of its sales to large customers like automobile companies and that helped ensure better realisations in spite of the rapid decline in the spot steel prices.

While a sequential comparison of steel companies' results is not strictly objective, but one does nevertheless observe signs of a slackening in the pace of the company's profit growth.

For instance, in the March 2005 quarter, the company had reported an 18.32 per cent y-o-y growth in its profit before tax and exceptionals, while in the December 2004 quarter, there was a 96.5 per cent y-o-y growth.

Also, while total expenditure has risen 6.46 per cent to 1876.31 crore in the June quarter, but as a percentage of net sales it has declined 153 basis points to 54.15 per cent thanks to the productivity enhancement measures implemented over the last few quarters.

As a result, operating profit grew 13.34 per cent to Rs 1588.21 crore and operating profit margin rose 157 basis points to 45.84 per cent in the last quarter.

Steel prices are expected to dip further in the next few months given the build - up of inventory in domestic and international markets coupled with increased quantities of overseas steel finding its way in the domestic market.

Clearly, there is a need for the management to ensure further productivity gains in a bid to maintain profit and operating margins.

Hence, the company's recent decision to acquire a stake in an Australia based coal project is being viewed as a step in the right direction in a bid to keep raw material costs in check.

Gujarat Ambuja

Gujarat Ambuja Cements Ltd (GACL) has reported a 38 per cent growth in its earnings before tax in the June quarter to Rs 165.7 crore.

However, the company had merged Ambuja Cement Rajasthan Ltd with itself from June, 2004 hence the figures for the last quarter are not comparable with those of the corresponding quarter of the previous year.

Nevertherless, the combined entity saw its operating profit margin rise 105 basis points to 30.79 per cent in the last quarter.

Cement realisations were more or less flat on a y-o-y basis in the last quarter. Like earlier quarters, a highlight of the company's performance was the steps taken to minimise the impact of higher input costs ""- for instance, the company has started using rice husk as a fuel substitute for coal.

The impact of higher coal prices on the cement industry is well documented. Also, the company's sea- based bulk transportation has helped it to keep a better check on freight costs incurred. In contrast, operating margins at its competitors have been squeezed by surging land freight costs.

These steps have not gone unnoticed by the Street and it has helped the company's stock to outperform the Sensex over the past one month - the stock has gained about 9.5 per cent as compared to a six per cent gain in the broader market.

Going forward, the anticipated pick up in cement prices in the post monsoon season is expected to flow into the company's bottomline.

That would be a key factor justifying its valuation, as the stock is trading at about 18.5 times trailing earnings, which is at a premium to its peers.

With contributions from Amriteshwar Mathur.