Make a fast buck

Bank of Maharashtra is no long-term investment

Unlike a number of banks that tapped the markets earlier , Bank of Maharashtra has chosen the right time to go public, a time when it can charge a premium of Rs 13 a share.

Not that the bank needs capital immediately""""its capital adequacy ratio was 12.61 per cent as on September 30, 2003, far higher than the required 9 per cent. Tier-1 capital itself was 7.44 per cent. But clearly, the opportunity is too good to miss.

The bank justifies its premium by comparing its price-earnings ratio of 3.43 at the offer price with its peer group average of 5.5. It also points out that its price to book, based on its March 2003 net worth, is a low 0.8. Of course, if net worth is adjusted for net non-performing assets, price to book goes up substantially to 1.67.

That may not pose a problem, provided there's a chance of profits accelerating in future. Unfortunately, as with so many banks, profit on sale of investments constituted a very large chunk of profits in FY 2003.

Last year, net profit amounted to Rs 222 crore, while profit on sale of investments were Rs 215.94 crore. Those windfall profits are unlikely to be repeated this year.

But perhaps the lack of treasury profits will be compensated by other means? It's hard to assert that, simply because fee-based income actually declined in FY 2003.

Provisions for NPAs too are going up. And while it's true that net interest income is rising, that is unlikely to be sufficient to make up for the lack of income from capital gains.

What's more, NPAs have been rising. Net NPAs as on September 30 were Rs 494 crore, well above the Rs 459 crore level as on March 31. New NPAs continue to be booked, and gross NPAs rose by Rs 208 crore in the first half of the current fiscal, compared to a rise of Rs 267 crore in the whole of FY 2003.

The data for deposits and advances also show that outstanding advances as on September 30, 2003 were lower than at end-March, while the year-on-year rise was a meagre 5.31 per cent. Similarly, outstanding deposits were lower in September than in March.

Among the "peer group" identified by the bank, all except Allahabad Bank have return on assets higher than Bank of Maharashtra. With earnings per share much lower than Bank of Maharashtra, it's quoting at around Rs 28.

Like all the others, the Bank of Maharashtra IPO too is likely to be oversubscribed in the current environment, and investors could exit on listing.

IBP: A slick affair

At IBP's roadshow on Thursday, the company's senior management highlighted to the audience the attractiveness of the inherent strengths of the company.

IBP is primarily an oil marketing company and it has one of the most extensive marketing networks in the country. And in the post-APM sector where competition is set to grow significantly, the management is confident it will be able to grow its customer base.

The moot question is whether the company's business model would be able to drive earnings growth in the future?

There is no doubt that IBP's has improved its balance sheet in the run up to the issue. IBP Ltd's net profits have jumped 28.7 times to Rs 39.25 crore in the quarter ended December 03.

Growth in sales of the company was moderate in comparison to profits growth - topline grew 31 per cent to Rs 2831.06 crore in Q3FY04. The surge in profits was achieved largely owing to a huge improvement in the profitability of the petroleum division to Rs 56.24 crore.

The profitability of the company's other divisions, explosives and cryogenics, was at levels comparable to those in the previous year.

Expenditure incurred on purchase of goods for resale and raw materials increased 33 per cent, and it was in line with the expansion of the petroleum division.

As the company is primarily marketing oriented, an upsurge in raw material costs is not a matter of concern. It is commendable that the company has been able to kept staff costs in check, given the attractive pay packages offered in the private sector.

Operating profit in Q3FY04 grew to Rs 48.4 crore from an operating loss of Rs 61 lakh in the previous year.

While the bid price has not yet been finalised, the company's EPS for FY03 was Rs 39.62 and for the nine months this year, this ratio has already grown to Rs 54.68.

Despite the improved performance, underlying risks still remain - aggressive, new private sector players could poach the oil PSU's existing dealers with a better commission structure. Such a development could restrict future growth at IBP.

With rivals' scrip trading at a multiple of 8, an offer price of around Rs 425 for IBP seems the consensus figure among analysts, to ensure long term value for potential investors.

With contributions from Amriteshwar Mathur