SBI: Against all odds

SBI has a tough road ahead to improve its net interest income

State Bank of India's (SBI) net interest margin declined to 3.29 per cent for the nine months ended December 2006 compared with 3.32 per cent in the first half of FY07.

The Q3 results had exceptional items such as the IMD repayment and tax refund, so analysts were expecting net interest income to decline by about 4-5 per cent y-o-y.

However, the net interest income has fallen 6.36 per cent. Net of the one-off items, net interest income grew 33 per cent y-o-y. On a sequential basis, net interest income was up a meagre 1.35 per cent.

Pre-provisioning profit increased by 9.8 per cent as operating expenses declined 16 per cent y-o-y. Advances have grown 27 per cent y-o-y at the end of Q3 FY07, but deposit growth is lagging behind at 11.2 per cent, which the bank attributes to its conscious strategy of lesser dependence on bulk deposits.

The increase in cost of deposits was contained as low cost deposits increased by 244 basis points y-o-y to 43.3 per cent of deposits. Retail advances grew 23.6 per cent y-o-y, and account for just 25.76 per cent of the bank's non-food advances.

Non-interest income increased 38 per cent y-o-y, after excluding the forex gains on IMD in Q3 FY06, but core fee income gain was just 1.3 per cent q-o-q.

Like other banks, SBI too has increased deposit rates, which will have some pressure on its margins going forward, despite the PLR increase.

Thus, the bank has a tough road ahead to improve its net interest income, which is up just 1.35 per cent q-o-q in Q3 FY07 after a sequential 0.37 per cent increase in Q2 FY07.

The bank trades at 2.3 times its estimated FY07 book value and 1.9 times FY08 book value. The stock has gained 30 per cent against the Sensex gain of 48 per cent, and is likely to continue being an under-performer.

Dabur: Growth supplement

Dabur has reported a revenue growth of just under 15 per cent y-o-y for the December quarter, somewhat lower than the Street's expectations.

However, the operating profit margin has expanded by 85 basis points y-o-y, despite input cost pressures to 16.3 per cent and as such the operating profit was higher by 17.7 per cent.

The slower-than-expected growth in top line was mainly because of the lower output from the international division and also according to the management, because of a base effect.

Foods, home care and toothpaste drove top line growth, while health supplements and toothpowder businesses grew at a slower pace than they did in the first half of the year.

Input costs were higher""raw materials to sales rose by 150 basis points y-o-y but a fall in ad spends of 140 basis points ensured a better margin. The company has managed to take price hikes on several products including honey, toothpaste and shampoos primarily because it has some strong brands such as Vatika and Real.

Dabur already has a good product mix and is aggressively expanding its home care portfolio, apart from keeping aside $200 million for acquisitions. In order to boost margins, however, it may need to take further hikes because the tax sops that it receives from tax holiday zones are gradually reducing.

At the current price of Rs 105, the stock trades at 32 times estimated FY07 earnings and around 27 times FY08 earnings. Most of the upsides, in terms of growth, as also the best possible utilisation of cash appear to be priced in.