Out of sync: State Bank of India

High interest rates and drop in interest income mar SBI numbers

The story of State Bank of India's (SBI) fourth quarter results is that of high interest rates coupled with a decline in interest income. Interest income fell 1.6 per cent y-o-y in Q4 FY06. But interest costs increased 5.5 per cent, which resulted in net interest income declining a huge 10 per cent.

This number is quite below analysts' expectations. A 58.34 per cent increase in the other income aided the 12.08 per cent y-o-y rise in operating profit to Rs 3277.17 crore.

For the full year, SBI's net interest income increased by 12.13 per cent y-o-y in FY06 and operating profit improved by a small 2.81 per cent to Rs 11,299 crore.

The bank saw a wage increase of 17.6 per cent during the year. Other income was higher by Rs 531.54 crore due to exchange gains on IMD. Treasury operations saw a decline of 13.3 per cent y-o-y in FY06, posting a segment loss of Rs 1991 crore as compared to a segment profit of Rs 1061 crore a year ago.

Even on some other financial parameters, the bank's operations are weaker than FY05. Return on assets fell by 12 basis points to 0.89 per cent and return on equity declined by 263 basis points to 15.47 per cent.

Even net interest margin (NIM) , which was at 3.5 per cent for the nine month ending December 2005, fell in the fourth quarter taking the FY05 NIM to 3.4 per cent, just 1 basis point better than FY05. Net NPAs fell to 1.87 per cent at the end of March 2005 from 2.65 per cent a year ago. SBI's associate banks are doing well "" their deposits rising 19 per cent y-o-y in FY06, while advances went up 30 per cent.

Going forward, its cost of deposits will come down by 20 basis points as the higher interest outgo on IMDs is over. With the increase in lending rates, the bank should be able to maintain NIM. The SBI stock is down over 15 per cent from its high last Wednesday to Rs 860, and trades at about 1.1 times FY07 estimated book value.

Tata Motors: In the driver's seat

Tata Motors' March 2006 quarter results have been better than analysts' forecasts. Operating profit of grew 39.4 per cent y-o-y to Rs 892.84 crore in the last quarter compared with 28.9 per cent growth in net sales to Rs 6882.75 crore.

Operating profit margin expand 96 basis points y-o-y to 12.96 per cent in Q4 FY06. As a result, the stock has outperformed the market over the past four months - it has gained 21 per cent during the period compared with 11.3 per cent gain in the Sensex.

Total vehicle sales grew 23.2 per cent y-o-y to 148,343 units in Q4 FY06. Vehicle sales were powered by a 29.5 per cent y-o-y growth in the commercial vehicles segment to 71,416 units in the last quarter.

Within the commercial vehicle segment, LCV sales accounted for 28,400 units in Q4 FY06 compared with 18,000 units a year earlier. Implying, sales in the M&HCV segment amounted to 43,016 units in Q4 FY06 compared with 37,132 units a year earlier. Growth in the LCV segment was helped by buoyant sales of Tata Ace, which was launched in May 2005.

In its consolidated FY06 results, operating profit margins grew 10 basis points y-o-y to 12.87 per cent, despite adjusted raw material costs as a percentage of net sales falling 41 basis points y-o-y to 67.54 per cent. However, staff costs for the consolidated entity rose 24.35 per cent to Rs 1777.43 crore in the last quarter.

Clearly, growth opportunities came after the Supreme Court order banned overloading of trucks in the last quarter.

Typically, margins in the LCV segment such as Ace are lower vis-a-vis the M&HCV segment, say analysts. In contrast, in the first nine months ended December 2005, total commercial vehicles sales grew merely 6.1 per cent y-o-y to 143,120 units.

The company's share of the total commercial vehicles market at the end of FY06 was at 61.3 per cent as compared to 59.7 per cent a year earlier. The stock trades at about 13 times estimated FY07 earnings given the growth opportunities in the industry.