SBI: Bulging loan book

State Bank of India's operating profit looks decent too

The key to State Bank of India's second-quarter results lies in its advances growth. Advances grew by 24 per cent year-on-year and by 9.6 per cent compared with the level at the end of June this year.

The upshot was a welcome rise in net interest income, which rose not only because of the increase in lending volumes, but because net interest margin too has expanded substantially. The average cost of deposits has declined far more than the average yield on advances.

These trends proved strong enough to offset the sharp fall in profits from sale of investments, as well as the higher depreciation provision.

Adjusted for a one-time Rs 1,010 crore worth of premium on sale of government securities under the government's debt buyback programme in Q2, 2003, operating profit has been much higher in the last quarter.

Net profits were also boosted by lower provisions. Nevertheless, NPA provisions were higher than in Q1. As a matter of fact, the bank's performance has been much improved compared to the first quarter.

Net interest margins have increased, operating profits are much higher, and so are net profits. Net NPAs at 2.96 per cent are higher than their level a year ago, but have vastly improved compared to end-June's 3.45 per cent.

Will the results assuage investor concerns on the effect of the rise in bond yields on the bank's profits? The change in accounting norms, effected last quarter, has been a very effective buffer against higher yields "" provisions would have been higher by a huge Rs 4,300 crore, wiping out operating profits.

But depreciation on investments was much higher in Q2, with ten-year yields at 6.25 per cent as at end-September, while they have moved up to almost 7 per cent since then.

The bank has also not moved its securities to the 'held-to-maturity' category, which means that it will have to book depreciation on them going forward. But it is likely that these concerns will be more than offset by strong lending growth in the ensuing busy season, despite an expected moderation in the rate of growth.

Dr Reddy's

The street was well aware of the pressures on Dr Reddy's bottomline and expectedly, its net profit fell 63.5 per cent last quarter. Profit has declined in eight of the last nine quarters, because of increasing competition in the generics business and higher research and development (R&D) costs.

Revenues in the API and intermediates segment declined 14.4 per cent due to a sharp decline in revenues in Europe (down 59 per cent). And in Europe, profitability of products like ramipril has fallen due to strong competition and pricing pressures. As a result, segment profit nose dived 71 per cent to Rs 12.4 crore

Similarly, segment profits for the generics division has shrunk almost 93.6 per cent to a mere Rs 77 lakh in the last quarter due to key products like Fluoxetine and tizanidine facing strong pricing pressure in the key US market. The lack of profitability has been compounded by R&D costs rising 26 per cent to Rs 58.83 crore in the last quarter.

These factors have led to a 63 per cent fall in the company's overall operating profit to Rs 45.31 crore, with operating margin falling 1660 basis points to 10.5 per cent. Going forward, it's difficult to expect a change in the company's performance as it has had no big product launch lately.

Auto sales a mixed bag

Passenger vehicle companies were expected to report decent month-on-month growth in October sales, thanks to the festival of "Dusshera" last month. Two-wheeler majors Hero Honda and Bajaj Auto didn't disappoint, and reported month-on-month growth of over 13 per cent in October.

In Bajaj's case, the growth was a tad lower than expected, as the launch of "Discover" was expected to result in higher growth. The month-old "Discover" did sales of 19632 units, around 14 per cent of total bike volumes.

Its the "CT 100" (63 per cent of bike volumes) continues to dominate Bajaj's bike sales. Hero Honda's growth has been impressive, coming over a much higher base-its total sales last month stood at 2.45 lakh units.

Both the Hero Honda and Bajaj Auto stocks were flat despite the good growth recorded last month. First, October sales were expected to be higher.

Secondly and more importantly, it remains to be seen that the growth continues beyond the festive season which lasts till December. Apart form a possible increase in interest rates, there are also concerns of new launches eating into the share of established models.

Passenger cars major, Maruti also reported a decent 9 per cent month-on-month growth in domestic sales in October. This comes on the back of excellent results for the September quarter.

The Maruti stock has risen to around Rs 380, 12 per cent higher than the lows it hit after Suzuki announced its plans to set up a new plant.

With contributions by Amriteshwar Mathur and Mobis Philipose