SBI: Shifting focus

After protecting its margins, SBI has to catch up with the booming retail segment

During the second quarter, State Bank of India (SBI) seems to have focused on protecting margins, though business growth was muted. Net interest margin improved by 19 basis points on a y-o-y basis for the first half to 3.32 per cent, but were lower than the 3.37 per cent in the June 2006 quarter. However, net interest income increased just 8 per cent in the second quarter.

In the first quarter, net interest income had gone up 9.68 per cent. SBI has been able to keep its borrowing costs low, which is because it has not chased deposits aggressively like its competitors, its low reliance on bulk deposits and a higher proportion of low-cost deposits.

Cost of deposits in the first half in FY07 was 13 basis points lower than the corresponding period in the previous year. SBI's deposits grew 10.8 per cent y-o-y at the end of September 2006.

Also, savings and current accounts increased by 316 basis points to 42.64 per cent of the total deposits. Yield on advances improved by 74 basis points in H1 FY07, though a lower yield on investments has resulted in its yield on resources remaining flat in H1. Its loan book increased 21.2 per cent y-o-y, while its investments declined.

Its fee income growth, which was quite low at 3.75 per cent y-o-y in Q1, improved dramatically by 36 per cent in Q2, due to higher charges from retail customers and higher government fees. Operating profit grew 24.7 per cent, as operating expenses declined by 2 per cent.

The challenge for SBI is to improve its loan book, especially retail assets, where ICICI Bank has gone ahead. The bank seems to have got its operating costs under control, which is reassuring.

Higher service charges will bring better fee income going forward. The SBI stock trades at about 1.85 times estimated FY07 book value and 1.65 times FY08 book value.

Ranbaxy: Buoyed by buys

Ranbaxy's growth in the September 2006 quarter has been propelled by higher volumes in the 80 mg simvastatin tablet (medication for lowering cholesterol), coupled with its earlier acquisitions, such as Romania-based Terapia and the the unbranded generic business of Allen, a division of GlaxoSmithkline, Italy.

Ranbaxy's consolidated operating profit grew a whopping 540.4 per cent y-o-y in the last quarter, as compared with an 18.4 per cent growth in its income from operations. Operating profit margin also jumped 1,360 basis points y-o-y to 16.7 per cent in Q3 CY06.

In the June 2006 quarter too, Ranbaxy's operating profit margin had improved by 571 basis points y-o-y to 18.2 per cent. In the September 2006 quarter, sales in the key US market grew 25 per cent y-o-y to Rs 435 crore, powered by higher volumes in simvastatin, despite the pricing pressure.

Also, sales in Russia, Ukraine and Romania jumped 188 per cent to Rs 202 crore, helped by the synergies created through Terapia. In the domestic market, sales grew 13 per cent to Rs 355 crore, with growth in product segments, such as asthma and cardiology.

Over the medium term, Ranbaxy's growth is expected to be driven by its operations in Eastern Europe and India. With the stock trading at 31 times estimated CY06 earnings and 21 times CY07.

BHEL: Input blues

Given the strong upturn in the capex cycle, the focus on Bharat Heavy Electricals Ltd's (BHEL) September 2006 quarter results shifts on its ability to manage rising input costs, which it hasn't been able to do well. The company has seen its operating profit expand 23.6 per cent y-o-y to Rs 456.3 crore in Q2 FY07, as compared with a 33.1 per cent growth in adjusted net sales to Rs 3,341.2 crore.

As a result, the company has seen its operating profit margins decline by 110 basis points y-o-y to 13.6 per cent in the last quarter. This pressure on operating margins was due to raw materials (mainly non-ferrous metals) as a percentage of net sales rising 200 basis points to 55.5 per cent.

Earlier, Crompton Greaves had also seen its operating profit margins decline by 50 basis points in the last quarter, due to higher input costs.

Meanwhile, BHEL's key power division reported another quarter of buoyant order inflow "" orders bagged in Q2 FY07 include a 250 mw project at the Surat Lignite power plant from GIPC, valued at Rs 1,200 crore.

As a result, segment profit of the power division expanded 37 per cent y-o-y in the last quarter. Going forward, growth momentum is expected from its outstanding order book, which amounted to Rs 45,700 crore at the end of Q2 FY07, a growth of 41.9 per cent.

However, high inputs can once again hurt margins in the next few quarters. Nevertheless, the stock trades around 27 to 28 times estimated FY07 earnings, given the growth potential in the medium term.