SBI: Accounting boost

SBI needs to raise lending to offset drop in treasury income

The SBI scrip fell almost 6 per cent on Tuesday after the announcement of the bank's first quarter results. While net profit rose 17.55 per cent compared with Q1 FY 2004, operating profit declined 18 per cent, thanks to lower profit on sale of investments.

Net interest income was up 10 per cent. Simply put, the rise in net interest income was not sufficient to make up for the lower profit on sale of investments.

Recall that in the third and fourth quarters of FY 2004, SBI's operating profit had also been lower than in the corresponding quarters of the previous year. The bank's cost to income ratio has also deteriorated.

Net profit was boosted by lower provisions and contingencies and also lower tax. Provisions for non-performing assets were much lower this year because of one-off provisions over and above the Reserve Bank of India (RBI) norms made in Q1 last year.

Further, in accordance with RBI norms, the bank changed the method of accounting for investments as a result of which its provisions have come down drastically. If it had stuck to the earlier norms, the notes to the accounts say that "provision would have been higher by Rs 2,242.76 crore and profit before tax would have been lower by the same amount". In other words, it would have wiped out the bank's operating profit of Rs 2,071 crore.

Net non-performing assets were at 3.45 per cent compared with 3.48 per cent as at end-March 2004. In "other income", while fee-based income grew 14 per cent, dividends were higher by a large Rs 286 crore.

However, SBI's average level of advances has increased by 13.79 per cent, well above the 10 per cent average growth seen last year, and Q1 is traditionally a sluggish period for lending. The bank needs to increase loans sharply if it is to meet its target of 23 per cent growth in net profit this year.

Maruti does well

Maruti's June quarter sales grew 23.8 per cent on the back of a 18.9 per cent growth in volumes. Profitability improved yet again, leading to a 55 per cent jump in operating profit.

But unlike FY04, when the majority of cost savings came from a decline in raw material spend (thanks to discounts from Suzuki), last quarter's improvement in profitability was because of other reasons. The company's VRS last year led to a 22 per cent drop in staff cost.

As a percentage of sales, staff cost fell 100 basis points. Besides, other expenditure also fell 100 basis points as a percentage of sales thanks to economies of scale.

FY05 results are expected to mirror the first quarter performance, given that cost savings will continue owing to a lower staff strength and better utilisation.

Besides, vendor consolidation, localisation of components, and the reduction of inventory will also help profitability. Another positive factor is consumers' shift from Maruti 800 to Alto, which is positioned at a slightly higher price.

The only hitch could be a drop in rural incomes owing to a bad monsoon, which would impact sales in that segment. However, the market does not expect overall performance to be hit much "" the Maruti stock has been going strong at around 17 times FY05 earnings and an enterprise value which is 7.5 times estimated EBITDA.

Reliance numbers show upturn is intact

The key takeway from RIL's results is that the upturn in petrochemical sector is intact, as well as the company's refinery division continues to earn robust gross refining margins. The company profit before extra-ordinary items in the June quarter rose 24 per cent to Rs 1,768 crore.

Petrochemical division: The much hyped slowdown in Chinese demand for petrochemicals has not been felt this quarter. Crucially the company has been able to get better prices for its product portfolio. Hence strong input prices like that of naphtha were made up by improved price realisations.

Thus, while segment revenues rose 17.3 per cent to Rs 8,142 crore in the June quarter, better pricing conditions helped segment profit grow 50.4 per cent to Rs 886 crore.

Going forward, analysts expect petrochemicals demand to outpace supply until mid-2006, so profitability of this division is expected to improve even further in the next quarters.

Refinery and marketing: The upturn in demand is visible with the Jamnagar refinery operating with a capacity utilisation of 118 per cent.

Also, the company's gross refining margins (GRM) were robust in tune with strong crude prices prevailing in international oil markets- average Singapore refining margins were estimated at $5.75 per barrel in the June quarter.

However, RIL's senior management pointed out that their gross refining margins were over $7 a barrel. Segment profit jumped 39.25 per cent to Rs 1114 crore in Q1 FY05.

With contributions from Mobis Philipose and Amriteshwar Mathur.