Home >opinion >online-views >Mark to Market: Corporate focus to benefit UBI

With credit growth shifting from the retail to the corporate sector, state-owned banks are back in fashion. Their low valuation compared to the private sector banks is an added advantage. The Union Bank of India (UBI) stock has been one of the beneficiaries of this trend, moving up 20% in the past month, easily beating the BSE Bankex’s 6.6% rise over the period.

UBI was tipped by analysts to perform well on the basis of stronger loan growth, margin expansion on account of higher interest rates for advances and as a result of growing its loan book through high-yielding assets, higher fee income, a larger proportion of low-cost current and savings account (Casa) deposits, its exposure to the capex cycle and stable asset quality.

How has the bank performed on these parameters? Well, loan growth has been nothing to write home about, with advances increasing by 14% year-on-year (Y-o-Y).

There hasn’t been much of a change in the proportion of demand deposits to total deposits. But net interest income is up 21%, partly the result of higher net interest margins. Non-interest income growth, too, has been high, while the cost to income ratio has improved. The upshot: the bottom line has grown 34.7% Y-o-Y. However, compared with the March quarter, margins are lower and the cost to income ratio, too, has worsened.

But NPA (non-performing assets) levels have come down further, with net NPAs improving from 0.96% of advances as at end-March to 0.78% on 30 June. The reduction in bank deposit rates will help to expand margins further, while loan growth should pick up in the coming months. Further, at an FY08 estimated price-to-book of around 1.3, there should be no dearth of reasons for being bullish on the stock.

Sun Pharmaceutical Industries Ltd surprised with better than expected revenue and profit. Gross sales rose 22.5% to Rs655.4 crore, driven by domestic sales, which accounted for two-thirds of the incremental growth. Exports increased 18% to Rs260.7 crore, riding piggyback on US subsidiary Caraco’s 30% growth in the US generics market.

Caraco’s sales rose 43% in dollar terms, but the rupee appreciation took off some of the sheen.

What’s important is that the rise in the rupee hasn’t hurt Sun Pharma’s profitability as much as analysts had estimated. The firm’s operating profit margin fell 120 basis points last quarter. In its results preview, Motilal Oswal Securities had estimated that margins could fall 240 basis points because of the rupee appreciation and a high base last year. But savings on operating overheads and staff costs helped the company offset that by about 120 basis points. Caraco, too, saw margins expanding as its net income rose 70% from the year-ago period.

Net profit grew by 28.6%, as higher other income more than made up for the slight drop in margins. Other income rose 121% to Rs60.6 crore on the back of gains from forex fluctuations.

Sun Pharma shares gained just 1% despite the impressive results. Also, despite the impressive listing of Sun Pharma Advanced Research Company Ltd (Sparc) last week, Sun Pharma shareholders have lost value since the de-merger. Its shares traded at Rs1,182 prior to the demerger. Each share is now worth Rs1,097, after including the value of Sparc. Analysts say the fall in valuation is because of uncertainties with the Taro acquisition, which has faced opposition from a minority shareholder.

But current valuations, at 22 times trailing earnings, aren’t very demanding relative to the rate at which Sun Pharma is growing earnings. Analysts expect earnings growth at the firm to continue in strong double digits for at least the next couple of years, based on which the stock trades at about 16.5 times FY09 earnings.

Write to us at marktomarket@livemint.com

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