The banking segment of the State Bank of India (SBI) grew its profit by Rs821.86 crore in the December quarter compared with the year-ago period, while profit from the treasury segment increased by Rs995.72 crore.
Although the treasury segment was the bigger contributor to profit growth, there have been several improvements in the bank’s performance during the quarter.
SBI’s operating profit growth of 55.72% compared with the year-ago period is due to both high growth in net interest income as well as higher non-interest income. Net interest income rose by 23.8% year-on-year (y-o-y), much higher than the 6.3% growth in the September quarter. Interest expended as a percentage of interest earned was 66.4%, below the September quarter’s 67.6%. The proportion of low-cost Casa (current and savings deposits) was a high 41.05% of total deposits, better than in the previous quarter. As a result, the rise in the cost of deposits was not as much as the increase in yield on advances.
Within non-interest income, fee income showed a healthy growth of 18.9%, well above the 11.9% growth in the September quarter. But the bulk of the 48% increase in non-interest income was contributed by profit on sale of investments and forex income. The final result: a 69.8% rise in net profit to Rs1,808.64 crore.
Advances growth, at 25.6%, was well above the industry average, which means that chairman O.P. Bhatt’s strategy of increasing market share is paying dividends. Other improvements include the net NPA (non-performing assets) ratio at 1.44% at end-December, compared with 1.63% at the end of September. What’s more, because of the rise in profits the bank was also able to increase its provision for bad loans cover, which went up to 47.3% compared with 45.2% at the end of September. It’s not adequate—the cover was 54.69% a year ago—but at least the slide has stopped.
Together with the improvement in the main bank, the associate banks too have done well, with net profit going up 17.2% y-o-y for the nine-month period ended December, compared with a y-o-y rise in net profit of 16.9% in the first half. Their market share in deposits and advances has improved. For the life insurance subsidiary, market share has gone up from 3.11% at end-August to 4.13% at end-September and it has wiped out its accumulated losses. The stock has been one of those least affected by the recent market decline, having lost only 6.6% from its 52-week peak, while the Nifty has fallen 15% from its highs. The fund infusion through the rights issue will ensure even better performance in future.
Transforming from a quasi-commodity player to one that now clearly enjoys pricing power, Marico Ltd has come a long way. The company’s flagship product, Parachute hair oil, had limited pricing power earlier, with regular price adjustments to reflect underlying copra prices. But since August 2004, the company has held the price of this product, despite input prices dropping by as much as 40%, according to Macquarie Research. In July, the company went a step further—it increased prices of Parachute by 3% in anticipation of a rise in input costs. Instead, copra prices are down by 10-12% on a y-o-y basis, but the company hasn’t reversed its price increase. Importantly, the company’s premium pricing hasn’t affected volume growth. Its market share has been intact at around 48%. Marico’s acquisition of “Nihar” from Hindustan Unilever Ltd has further established its dominance of the organized hair oil market.
The stock markets have put a premium on the company’s steady growth story, which now has the added lustre of pricing power. At its peak in January, the stock was quoting at 34 times trailing earnings. But that seemed stretched. After all, another large part of the business—edible oils—is still pretty much a commodity play, and the the company’s new business ventures are still to contribute significantly to profit. This fiscal, consolidated operating profit has risen by 23%, hardly a case for a valuation of 34 times. True, profit before tax has risen at a faster pace (55%), but that’s because of a one-off jump in other income and a sharp reduction in amortization charges, which fell simply because the company set off the carrying value of intangible assets against its reserves on the balance sheet, rather than providing for it in the profit and loss statement.
The stock has corrected about 23% in the recent market decline, higher than the 15% fall in the Nifty, suggesting that valuations had indeed become stretched. The company’s results for the December quarter reiterate the 20-25% growth the company has seen for some time now, and provide no reason for substantial upgrades.
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