PNB: Rich deposits

Chunk of low-cost deposits helped PNB manage interest costs

The December 2005 quarter was quite good for Punjab National Bank (PNB), which is one of the more efficient public sector banks. The bank has posted an operating profit growth of 27.3 per cent y-o-y to Rs 548.36 crore in Q3 FY06.

The bank's net interest income increased by 17.28 per cent to Rs 1,207.4 crore, while its interest earned rose 15.13 per cent. The bank managed its interest costs well during the quarter because of a higher proportion of low cost deposits, which accounted for 48.64 per cent of total deposits compared with 45.9 per cent in the September 2005 quarter.

The cost of deposits stood at 4.32 per cent, slightly higher than 4.3 per cent in the first half. Total deposits grew 10.2 per cent y-o-y to 1.06 lakh crore.

The bank's advances increased by 31.1 per cent y-o-y to Rs 67,190 crore, with the contribution of retail advances increasing to 21.2 per cent against 20.4 per cent a year ago, of which housing loans went up by 23 per cent.

The bank's net interest margin improved to 4.02 per cent in the December 2005 quarter against 3.86 per cent a year ago and 3.99 per cent in the first half.

PNB's other income has fallen by 1.4 per cent. According to analysts, the reason for this fall was owing to losses in forex transactions, though fee and commission improved.

The bank's capital adequacy ratio improved by 88 basis points to 13.99 per cent. Its asset quality, which is far superior to other banks, improved further as net NPAs to 0.25 per cent compared with 0.28 per cent in Q3 FY05.

But PNB's solid performance at the operating level could not be translated to net profit, which went up only 17.87 per cent to Rs 370.44 crore on account of 52.75 per cent increase in provisions and contingencies, mainly because of a higher provisioning on account of pension and gratuity, despite a write-back of provision for FBT on contribution to pension fund of about Rs 52 crore.

In FY06, its EPS growth will be lower owing to the 20 per cent equity dilution over last year. At its current price of Rs 445, the stock trades at about 1.3 times FY07 adjusted book value, which is not expensive.

Sun Pharma: Feeling the pinch

Sun Pharma has reported an almost 435 basis points y-o-y fall in its operating profit margins to 34.8 per cent in the December 2005 quarter, despite net sales expanding 35 per cent to Rs 423.6 crore (excluding other income and net interest income).

This fall in margins is attributed to pricing pressures faced in the US generics market by its subsidiary Caraco, coupled with a rise in other expenditure and raw material costs.

Other expenditure grew almost 36 per cent y-o-y to Rs 113.8 crore in the last quarter, owing to higher R&D expenses, according to analysts.

Export sales of Sun Pharma grew about 44 per cent y-o-y to Rs 182.69 crore, helped by its bulk sales expanding 71 per cent to Rs 52.5 crore, coupled with a 35.4 per cent growth in its formulations business to Rs 130.16 crore.

Analysts say Caraco was a key contributor to Sun Pharma's growth in formulations exports, which reported a 24 per cent y-o-y growth in quarterly revenues to $20.67 million (about Rs 91 crore) in the December 2005 quarter, thanks to improved demand in product segments such as hypertension and diabetes.

Improved sales at Caraco also helped boost bulk exports at Sun Pharma, as this segment caters significantly to Caraco's requirements.

Nevertheless, like other generic players, Caraco also had to face strong pricing pressures, which resulted in its loss increasing to about Rs 3 crore in the December 2005 quarter compared with a loss of about Rs 2.4 crore in the corresponding previous period.

Meanwhile, in the domestic market, Sun Pharma like other players, has also benefited from a revival of sales - its sales expanded 30.7 per cent to Rs 266.2 crore in the December 2005 quarter.

The Sun Pharma stock has gained over 19 per cent since its results were declared on January 30 and its planned spin-off of the R&D division, which will result in better operating profit margins. At the current price of Rs 806, the stock is richly valued.