SBI: Real growth is much higher

The rise in SBI's bottomline is understated

SBI's strong growth in advances, at 28.98 per cent year-on-year, set the stage for a 32 per cent rise in net interest income during the third quarter of FY05.

Growth in interest earned on advances more than compensated for lower interest on investments. Net interest income also rose by 8.3 per cent compared to Q2.

Net interest margin too has expanded, being 3.28 per cent for the first nine months of FY 05, compared with 3.15 per cent for the first half of the year. That was helped by the cost of deposits declining to 4.74 per cent for the 9 months ended December 2004, from 4.80 per cent in the first half.

The bank's other income rose in Q3 partly due to the Rs 146.40 crore profit booked on the sale of its stake in subsidiary SBI Fund Management to Societe Generale.

But more importantly, fee-based income also rose at 25.28 per cent in the first nine months, compared with a growth of 23.72 per cent in the first half.

The strong growth in core income was more than enough to offset higher expenses, primarily on the bank's computerisation programme.

Operating profits rose a massive 88.3 per cent, taking care of the high provisions for depreciation on investments as well as high provisions for NPAs.

The upshot: net NPAs fell to 2.56 per cent, compared with 2.96 per cent as at end-September. The bank has still not transferred securities to the "held-to-maturity" category, so it has taken a hit on depreciation in Q3, and the management obviously feels that interest rates will not rise rapidly. With the rate of inflation coming down, it has a point.

As a matter of fact, the 19.6 per cent y-o-y rise in net profit is understated, because of a very low tax rate in Q3 of FY 04.

After adjusting for the one-time income from the stake sale in SBI Funds, adjusted profits before tax are up 40.3 per cent y-o-y. That is the growth rate the market should be looking at, rather than the artificially low net profit growth number.

P&G-Gillette

Procter & Gamble is buying Gillette in a deal worth $57 billion. The deal is structured such that Gillette shareholders will get 0.975 P&G shares for each Gillette share.

Further, P&G will have a buyback worth $18-22 billion open for the next 12-18 months. Effectively, the financial impact of the deal would be as if it were financed with approximately 60 per cent stock and 40 per cent cash.

Since prima facie it is a share swap agreement and since Gillette shareholders will continue as P&G shareholders (unless they use the buyback or the open market to exit), it will in most likelihood be seen as a merger as far as Sebi's takeover rules go.

Chartered accountant Jayant Thakur points out that in the case of global mergers, companies are exempt from making an open offer to minority Indian shareholders.

P&G, then, may not be mandated to make an open offer to Gillette India shareholders. It's interesting that the Gillette India stock still jumped by around seven per cent on hopes of an open offer.

Analysts point out that Gillette India's promoter stake currently stands at over 85 per cent and according to Sebi's new guidelines this will have to be cut below 75 per cent. Rather than diluting their stake, it may just be easier for the new promoters to buy out the minority stake in Gillette's Indian subsidiary.

Meanwhile, P&G's listed Indian entity also jumped around five per cent on the acquisition news, but the main benefits from the deal should largely trickle to P&G's unlisted subsidiary which carries out the core detergents and shampoo businesses.

Grasim

Grasim's Q3 results comfortably beat expectations. The company has declared a 33 per cent growth in its net profit to Rs 217 crore in the December quarter, helped by an improved performance of its sponge iron and fibre and pulp divisions. Clearly, Grasim's growth story is still intact.

Segment revenues of the sponge iron division have grown 68 per cent to Rs 262.73 crore in the last quarter, helped by a 15 per cent improvement in sales volumes and net realisations also improving 48 per cent to Rs 13, 063 a tonne. As a result, segment profit grow 92.8 per cent to Rs 90.74 crore.

The fibre and pulp division was also able to improve its performance due to better realisations "" VSF realisations had improved 15 per cent to Rs 81, 066 a ton.

However, segment profit grew only 8 per cent to Rs 145.98 crore, as the company had to facing rising costs for inputs like sulphur, which have increased about 15 per cent y-o-y.

A larger turnover has helped overall operating profit of the company grow 23.1 per cent to Rs 392.65 crore ( excluding other income) and operating profit margin has grown 123 basis points to 25.17 per cent.

Going forward, strong demand conditions in the steel industry are anticipated to help the company's sponge iron division to further improve its profitability. Also realisations in the VSF business are expected to remain strong, given the upturn in the domestic textile industry.

With contributions from Mobis Philipose & Amriteshwar Mathur