India’s largest lender, State Bank of India, has withdrawn a circular calling a stop to new tractor financing, saying it was misunderstood. While the extract from the circular may have been quoted out of context, it’s very likely that chairman O.P. Bhatt is being castigated for speaking what was obviously the truth.
The bank’s management had advised its branches in early March that the guidelines on tractor financing should be held to strictly, implying that these rules have been flouted in the past, and the bank was suffering as a result.
Later, after announcing the bank’s annual results, Bhatt said that non-performing assets, or NPAs, have increased sharply in agriculture because “people stopped repaying loans after the announcement of the farm waiver package”. He was explaining why the bank’s NPAs had shot up in the March quarter.
What all this shows is the sharp divergence between the bank’s interest and that of the government, and this “policy risk” is responsible for part of the lower valuations that public sector banks get.
Data with the Reserve Bank of India show that, as of 31 March 2007, NPAs in agriculture totalled 20.03% of SBI’s NPAs. Farm loans, both direct and indirect, made for a much lower 14.5% of its net bank credit, implying that agriculture has a disproportionate share of bad loans.
Some banks whose agricultural NPAs were high as a proportion of total NPAs at 31 March 2007 include State Bank of Patiala (33.37%), Allahabad Bank (29.34%), State Bank of Indore (22.43%), and Punjab and Sind Bank (21.65%). One reason for the high farm NPAs at SBI is because of the deeper penetration the bank has in remote areas.
For public sector banks, farming-related advances were 15.6% of net bank credit at 31 March 2007, while non-performing loans in agriculture accounted for 16.86% of total NPAs. Advances to small industries fared even worse, accounting for 8% of outstanding credit, but 15.14% of total NPAs.
The full impact of the government’s directives to public sector banks on lending is evident in the 59.46% of the total bad debts they have due to priority sector lending, which are only 39.6% of net bank credit. Agriculture is not the chief culprit, because “other” priority sector advances, which include small business finance and advances to weaker sections, account for a larger chunk of NPAs despite accounting for a smaller percentage of net bank credit.
SBI has no option but to meet the government’s targets to finance agriculture; it is aiming for a growth of 33% in direct agricultural loans this fiscal that started on 1 April. But, it is also aiming to bring down NPAs in the sector by concentrating on thrust areas, such as kisan (farmer) credit cards, gold loans, warehouse receipts, loans for spices and pulses, and to seed growers.
Ironically, the government’s debt waiver programme, if implemented swiftly, could actually help the bank bring down its NPAs. But, its impact on future NPAs is another matter altogether.
Dr Reddy’s: good guidance, but headwinds remain
Drug maker Dr Reddy’s Laboratories Ltd was not expected to grow in the fourth quarter because there were no exclusive revenues from its anti-emetic ondansetron, which added 16% of its revenues a year ago and earned gross margins well above the company’s average.
In fact, the fall of 15% in total revenues compared with a year ago is less than anticipated, with earnings from branded formulations up 22%, driven by growth in India, Romania and Commonwealth of Independent States. However, the 68% fall in net profits was expected.
The management has forecast a 25% rise in rupee revenues for the current fiscal year that began on 1 April, with a “significant improvement in profitability,” based on gross margins of about 50% and research and development expenses of 7% of revenues. In the last fiscal, gross margin was 51% and R&D expenses 7% of revenues, while revenues fell 23%, so the improvement in profits will have to come from revenue growth.
The company also expects to improve operations at its German subsidiary Betapharm Arzneimittel GmbH, which has been a severe drag on profits. The company has sorted out raw material shortages that plagued the unit. It has also transferred 13 products to India that account for half of Betapharm’s sales. However, pricing pressures in the German market will continue, with price cuts of between 6% and 8% expected on 1 June this year.
In 2006, when it bought Betapharm, the firm’s earnings before interest, taxes, depreciation and amortization, or Ebitda, was $39 million on revenues of $186 million. In 2008, Ebitda was $27 million on sales of $205 million. Unfortunately, however, the management says that while it will launch the authorized generic version of migraine drug imitrex a couple of months before the patent expires in February 2009, it’s “not a very big opportunity”.
While its stock has moved up on the guidance, headwinds will remain till Betapharm turns around, and until concerns about investors wanting to exit research outfit Perlecan Pharma Pvt. Ltd are cleared.
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