Indian Bank’s operating profit before provisions and contingencies has dropped by 7.3% in the fourth quarter compared with the year-ago period. However, lower provisions helped boost earnings and net profit growth was a tepid 2.7%.
Both net interest income as well as non-interest income declined. Net interest income was lower by 6.7%, while non-interest income fell 14.7%. But apart from interest costs, other costs were contained—operating expenses (both employee costs and other expenses) were lower than in the year-ago period.
Indian Bank’s profits had been boosted by recovery of bad debts in the fourth quarter of 2006-07, with Rs209 crore recovered in that quarter. In contrast, recovery during the fourth quarter of 2007-08 was a much smaller Rs97 crore. Treasury income was much higher during this quarter, but that couldn’t compensate for the fall in the recovery of bad debts.
A key reason for the decline in net interest income was a squeeze in spreads: interest expended/interest earned was 62.3% in the fourth quarter of 2007-08, compared with 54% in the corresponding quarter in 2006-07. Net interest margin for the nine months ended December 2007 was 3.4%, higher than the 3.34% for the full year 2007-08, implying a squeeze in margins in the fourth quarter. One reason is the lower proportion of low-cost deposits: Current and savings bank deposits were 32.3% of total deposits on 31 March, much lower than their 35.4% share a year ago. In fact, the proportion of low-cost deposits remained at around the March 2007 level at the end of December last year, indicating a substantial addition of high-cost deposits in the fourth quarter.
Gross non-performing assets as a percentage of gross advances have improved to 1.21% at end-March 2008, compared with 1.39% at end-December 2007, but net non-performing assets have had a slight slippage, from 0.21% to 0.24%.
In short, Indian Bank’s fourth quarter performance has been a far cry from the hopes generated in the third quarter, when operating profits increased by 59% year-on-year, and it’s no surprise the stock fell 7% on Wednesday.
The scrip has already fallen 43% from its peak and, at Rs45, trades at a reasonable 1.4 times the 2007-08 book value. But, given the trends in the fourth quarter, there will be little appetite for the stock.
UltraTech Cement: future imperfect
Shares of UltraTech Cement Ltd rose by more than 7% after the company announced a 21% rise in operating profit compared with the previous fiscal year. The markets seem enthused that profits rose amid concerns the government would intervene in cement pricing at a time when input costs have soared.
But that’s missing the larger picture. Things are likely to get worse. The government’s decision to ban cement exports speaks about its seriousness to control prices and contain inflation.
According to Alchemy Share and Stock Brokers Ltd, UltraTech exported 37.4% of the powdered cement produced in its Gujarat unit last fiscal year that ended 31 March. The company has said it plans to increase its domestic sales to mitigate the ban’s impact, but diverting such a large volume of powdered cement—1.86 million tonnes, based on last year’s exports—would mean higher costs. It could also pressure cement prices because of the sudden increase in supply.
To make things worse, the cost of imported coal has more than doubled in the past quarter. With the ban on exports, duties on imported coal can no longer offset cement exports. This will further increase input costs. With prices expected to remain flat at best from here on, the higher costs will lead to a drop in profits.
About a year from now, some of the large capacities planned by the industry will start stabilizing and the new supply is expected to result in oversupply in the next fiscal year that starts 1 April 2009. So, prices are expected to fall. Going by demand growth, it may take at least four years for consumption to catch up with cement supply.
Cement shares, including those of UltraTech, have underperformed by a large margin since early last year, when the government first interfered with pricing. In fact, valuations look cheap at less than eight times past earnings.
However, if the industry is headed for a downturn, the underperformance may last for a while.
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