ICICI: Treasury to the rescue

If treasury income is excluded, the bank had to contend with a mere 6 per cent net profit growth.

It hasn't been a great start to the current financial year for ICICI Bank. The bank may have posted a decent net profit growth of 25 per cent y-o-y in the June quarter to Rs 775 crore, but it's owing to robust treasury operations as capital gains increased 122 per cent.

If one looks at the profit before tax less treasury income, the number at Rs 777 crore is an increase of just 6 per cent.

While the increase in advances was a smart 35 per cent y-o-y, driven by increased corporate credit both at home and overseas, the pace of retail loan growth has slowed down to 29 per cent y-o-y.

However, core banking operations didn't yield much and the rise in the net interest income (NII) has been a subdued 16.2 per cent y-o-y to Rs 1,714 crore.

The growth in the NII has moderated despite the bank concentrating more on higher-yielding non-collateralised assets which couldn't offset the higher cost of bulk deposits during the quarter and a lower share of current and savings accounts (CASA).

Funding costs have risen sharply in the last two quarters to about 7.8 per cent in the first quarter of FY08 though this should come off in a more stable interest rate environment. The net interest margin (NIM) came down by about 37 basis points to 2.3 per cent from 2.67 per cent in the fourth quarter of FY07.

The growth in fee income at 35.4 per cent y-o-y to Rs 1,428 crore has been good with retail fees contributing the maximum. What is most disappointing is the deterioration in the asset quality with gross NPLs up 25 per cent sequentially while net NPLs for the first quarter of FY08 were up 300 basis points sequentially to 1.3 per cent.

At the current price of Rs 985, the stock trades at about 1.4 times FY09 adjusted book value (adjusted for both NPLs and subsidiaries) and is attractively valued given that the worst may be over in terms of cost pressures.

Cipla: Operational snags

Cipla's performance in the June 2007 quarter was adversely impacted by a rising rupee, coupled with an increase in operational cost structure.

As a result, the company's operating profit declined 30 per cent y-o-y to Rs 160.7 crore in the first quarter of FY08, while its income from operations expanded 4.8 per cent to Rs 901.8 crore. Its operating profit margin also declined 880 basis points y-o-y to 17.8 per cent in the last quarter.

Pressure on Cipla's margins was partly due to rising costs - for instance, other expenditure as a percentage of income from operations rose 270 basis points y-o-y to 25.2 per cent in the first quarter of FY08.

Higher other expenditure is attributed to rising manufacturing expenses, repairs and maintenance and travel expenditure on a y-o-y basis in the previous quarter.

Meanwhile, the company's total exports grew merely 2.1 per cent y-o-y to Rs 401.9 crore in the last quarter - which was attributed to the rising rupee, coupled with sluggish growth in high-margin formulation exports.

In the domestic market, the company's sales grew 6.9 per cent and the company pointed out that it was because of lower stocking of certain older brands in the marketing chain. In contrast, Ranbaxy had expanded its domestic sales by 19 per cent y-o-y in the last quarter.

Going forward, Cipla's low margin exports of anti-HIV medications coupled with a rising rupee could continue to put pressure on its operating margins. As a result, with the stock trading at nearly 20 times estimated FY08 earnings, it is expensive.

Siemens: Tripping over

Though Siemens posted a top line growth of 69 per cent y-o-y to Rs 1,782 crore in the June 2007 quarter, its operating profit growth was disappointing at 15 per cent.

If it weren't for profit on sale of investments of Rs 26 crore, the net profit growth of 45 per cent, would have been much lower.

Siemens' power business, which is its largest (nearly 52 per cent of total revenues) and fastest growing (113 per cent y-o-y) segment, made lower profits. The company has attributed lower profitability to provisioning for anticipated losses in some power projects.

Analysts also add that as the company is operating at full capacity, Siemens had to rely on higher outsourcing, which lowered the margin.

As a consequence, its margin in the power segment declined 540 basis points to 0.55 per cent. The performance of its other divisions was good with strong sales growth as well as margin improvement.

Siemens' operating profit margin declined nearly 250 basis points y-o-y to 5.08 per cent in the June 2007 quarter. Even in the March and December quarters, its operating margin had declined 285 basis points y-o-y and 165 basis points respectively due to cost pressures.

The company has a pending order book of Rs 10,816 crore, up 40 per cent y-o-y and unchanged sequentially. At its current price, the stock trades at 28 times estimated FY09 (September year end) earnings. The stock is unlikely to be an outperformer until its new capacities come up, which is expected over the next two-three quarters.

With contributions from Shobhana Subramanian and Amriteshwar Mathur