Although India’s largest lender State Bank of India’s (SBI) operating profit for the March quarter is up 10.2%, it has reported a sharp rise in bad loans. The bank’s gross non-performing assets, or NPAs, totalled Rs12,837 crore at the end of March 2008, up from Rs10,641 crore at the end of December 2007.
Its gross NPA ratio went up to 3.04% from 2.69% at the end of December. Similarly, its net NPA ratio was 1.78% on 31 March, compared with 1.44% in December.
SBI chairman O.P. Bhatt told analysts that NPAs increased sharply in agriculture because “people stopped repaying loans after the announcement of the farm waiver package”.
Bhatt also said that the slowdown in the economy was taking a toll on small and medium firms, and while his bank will handhold these enterprises, he believed NPAs in this segment would soon become standard assets as the economy revived.
The bank’s lending increased at an annual rate of 23.4%, down from 25.57% at the end of December, while deposit growth declined to 23.4% against 26.16% in the December quarter. Low-cost current and savings deposits were 43% of total deposits at the end of the March quarter, compared with 41.05% in the previous three months.
Net interest margins for the full year were 3.07%, compared with 3.01% for the nine months to December. Growth in net interest income was a muted 5.5%. Non-interest income growth, too, was tepid. Its provisions increased, but that was largely expected.
The highlight of the results was a big improvement in the bank’s cost-to-income ratio, which fell to 49% from 54.2% in fiscal year 2007-08, an impressive gain of 520 basis points. For the nine month to December, this ratio was 51.74%, so much of the improvement has come in the fourth quarter.
Part of the reason was a big fall in employee costs, which declined to Rs1,569 crore in the fourth quarter, compared with Rs2,023 crore a year ago. The management says it reduced headcount by 4,500 in the fiscal year that ended on 31 March. However, while other cost reductions would continue to hold, the bank plans to add 20,000 new employees in the current fiscal, so the benefits of lower employee costs may not last.
Bhatt also said that interest rates would remain stable for the next three-five months for both deposits and advances.
SBI’s biggest advantage is that it has raised a huge Rs16,736 crore through a rights issue. It will be able to put that money to use in the current year, boosting income and profits. But it needs to keep a wary eye on its NPAs.
Long-term gains for Aztecsoft shareholders
Technology solutions firm MindTree Ltd’s friendly bid for Aztecsoft Ltd isn’t all that attractive for the latter’s minority shareholders. Its buyout price of Rs80 a share represents a mere 2% premium to the firm’s closing share price.
Moreover, MindTree’s open offer relates to only 20% of the company’s equity capital, which means minority shareholders will be able to sell less than one-third of their holdings.
Although they might not benefit in the short term, Aztecsoft shareholders will profit in the long term, thanks to the stronger parentage MindTree will provide.
An analyst with a domestic brokerage points out that Aztecsoft’s progress has been slow on its own. MindTree’s revenues are three times as much as Aztecsoft’s and net profit nearly six times higher. It deals with much bigger clients, which should work to the benefit of Aztecsoft, which can offer its product engineering services to a wider client base.
In case the open offer is successful, MindTree will have more than 50% stake in the company, and analysts expect a merger at some point. Based on the deal valuation, Aztecsoft shares are valued at nearly 20 times past earnings, while MindTree trades slightly lower at 18 times earnings. Also, at current valuations, the swap ratio works out to roughly six shares of Aztecsoft for one share of MindTree.
For much of the last year, the ratio based on traded share prices was higher than 8:1. At one point late last year, Aztecsoft’s shares had fallen to as low as Rs48, or 40% lower than the price at which MindTree is buying a majority stake in the company. All these numbers show that Aztecsoft shareholders are getting a decent valuation.
From MindTree’s point of view, the acquisition will enable it to add another service line. Currently, the company gets about 6% of its revenues from testing services, a service Aztecsoft provides. But now with an entire bouquet of outsourced product development and testing services, its service line is that much stronger. If it’s able to improve margins of Aztecsoft’s business, the Rs189 crore it’ll spend on buying the majority stake will be money well spent.
Inflation up, yields down?
The ABN Amro India’s purchasing managers index for April remained at the March level, but what is more interesting in these inflationary times is the behaviour of the output and input prices indices.
The output price index, after easing sharply in March to its weakest rate for eight months, moved up a bit in April. In contrast, the input prices index in April was at a level above the 12-month average. The rise in input prices has already been seen in the March quarter results, with margins of many companies getting squeezed.
From the corporate point of view, however, the fact that the output price index increased in April shows an ability to pass on the rise in input costs, which means that demand continues to be robust.
It is supported by the seasonally adjusted output index, which showed a modest rise in April after showing a slowing trend for three months.
It’s no surprise then that the Reserve Bank of India (RBI) believes that demand pressures continue to be active in stoking inflation.
The other worrying trend is the continuing decline in vendor performance, with the suppliers delivery times index at 48.9 for both March and April. A reading below 50 indicates a worsening. “The further lengthening of lead times was linked to shortages of raw materials combined with high demand for them,” the report states. It is also borne out by execution problems dogging some capital goods firms.
Incidentally, the relief rally in the bond market continues, with the yield on the 10-year government bond shrugging off inflation numbers and falling to 7.87%. That’s quite a rally from yields of around 8.15% or so before the credit policy. At 7.87%, the real yield on the 10-year government bond is a mere 30 basis points. Either this level is unsustainable, or RBI will have to tighten further.
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