Judging from its performance during the June quarter, the much-talked-about slowdown in the housing sector has had little impact on LIC Housing Finance Ltd.
(ON FIRM GROUND) Profit after tax, at Rs104.66 crore, was up as much as 124% compared with a year ago. Loan sanctions showed no signs of slowing down and rose 55% against the June quarter of 2007.
True, the growth in disbursements was much lower at 24%, but it’s the amount of sanctions that is an indicator of future disbursements. Since big brother Housing Development Finance Corp. Ltd (HDFC) also showed few signs of a slowdown in the sector, and since bank credit data shows a pick-up in the rate of growth of housing loans, the reports of a slowdown in the sector appear to have been exaggerated. At the end of June, LIC Housing’s outstanding mortgages showed an annual growth of 25%, the same as at the end of March.
The worry, however, lies in the rise in bad loans during the quarter. The lender saw its gross non-performing assets (NPAs) rise from 1.7% at the end of March this year to 2.22%. That’s still better than the 2.77% gross NPA ratio the company had at the end of December, but the slippage from the March level is unfortunate.
Similarly, the net NPA ratio, too, has deteriorated from 0.64% at March-end to 1.15%, an indication that the company isn’t making enough provisions for bad loans.
In fact, provisions and write-offs were 72% lower in the June quarter compared with a year ago, and that has helped boost profits. But profits were higher by 57% at the operating level, which means that although lower provisions boosted profits, they were by no means the whole story.
Other reasons for the big annual rise in profits include lower operating expenses because bonus payments were accounted for in the March quarter instead of in the first quarter of the fiscal year, as used to be the practice. Also, higher non-interest income has contributed to profits.
The company’s stock has benefited in the recent rally in interest-rate sensitive stocks, especially after its results. The stock hasn’t fallen as much as HDFC has from its January highs. With the company raising interest rates in July and with 94% of its loans on a floating-rate basis, it should boost profits in the second quarter.
LIC Housing Finance has been able to improve its interest spread in the June quarter compared with the previous three months. If this rise is maintained, it will cushion the adverse impact of slower volume growth, when demand slows due to higher interest rates.
Dreary outlook for Ashok Leyland in medium term
India’s second biggest maker of commercial vehicles, Ashok Leyland Ltd, did better than its larger competitor, Tata Motors Ltd, in the June quarter.
While both firms reported a rise of about 15% in revenues and a 2-3% drop in operating profit, Tata Motors’ profit was boosted by a change in accounting policy relating to provisions for doubtful receivables. But for this change, profit would have fallen by 12.2% on an annual basis, and in that light, Leyland’s 2.3% drop in profit seems unremarkable.
The company’s revenue growth was almost entirely driven by price increases in the past year. Volumes were practically flat. However, there was an increase in the sales of engines and spare parts. But the price hikes were not enough to offset the increase in raw material costs, evident from the fact that operating profit growth was lower than growth in volumes. Profit per vehicle fell by 3.7%, while volumes rose by only about 1.4%.
Last quarter’s performance was also marred by large mark-to-market losses on the company’s foreign currency loans. After accounting for them, net profit fell by as much as 42%. Much of this is notional, and with the rupee now rising by more than 2% from end-June, the company could even post some gains in the September quarter.
The auto maker’s plans to double its capacity in two phases by fiscal year March 2010 could hamper earnings considerably in the medium term. The large capex comes at a time when interest rates are rising. Financial costs coupled with higher depreciation charges will eat into the already depressed profit.
Not only do high interest rates affect the company’s profitability because of a higher financial burden, it also impacts demand for its products, already evident in sluggish sales of its commercial vehicles.
So far this year, even volumes of the typically robust passenger buses have been stagnant. Even once the new capacity comes up, it’ll be a while before it will be optimally utilized. Given this backdrop, it’s fair to say that investors can expect unexciting numbers from the firm in the medium term.
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