Sinking ground

Sachchidanand Shukla & Prashant Kothari

IDBI, a premier development finance institution, for the first half of the year to September 2001 has continued with its dismal showing. The slowdown in the industrial activity has exacerbated the situation as a bulk of its earnings comes from long term project financing.
During the last five years IDBI has been on a downhill journey. Sanctions and disbursals during the last five years have been highly fluctuating. Its average cost of funds has seen a steady rise over the same period from 8.9 per cent in 1996-97 to 9.2 per cent in 1999-00.
This has affected its margins that have gone down from 3.7 per cent to 1.9 per cent during the same period. Further, the average return on funds too has been on a decline as a result of poor performance. It has shrunk from 12.6 per cent to 11.1 per cent.

During the first half of the current financial year, IDBI’s interest income declined by about 1.4 per cent to Rs 4056 crore. However, a shrinkage of 1.7 per cent in interest expenses to Rs 3211 crore helped the net interest income to rise 3.8 per cent to Rs 845.6 crore.
Operating profit rose marginally by 85 basis points to Rs 757 crore owing to a rise in operating expenses. However, net profit, plummeted 47 per cent owing to the doubling of provisions at Rs 427 crore even though depreciation and tax provisions declined.

To compound the problems further, its NPAs to net worth ratio was at a whopping 92 per cent and had provided a staggering Rs 993 crore as bad debts or provisions during 2000-01. Any further deterioration can easily erode IDBIs net worth in no time.

Recent reports suggest that the government wants IDBI, that holds 36 per cent in the troubled IFCI, to commit itself to the latter’s recapitalisation despite its unwillingness. To top it all, there is a degree of opaqueness in its disclosures as the IDBI Act, 1964 provides it with certain immunities. Is it a wonder then that the scrip quotes at a P/E of 1.6? Even the proposed foray into housing finance will not provide much respite to IDBI in the near future, unless there is a dramatic turnaround in the fortunes of the company.

Nirma
Nirma’s operating income (excluding excise duty) contracted by six per cent to Rs 454 crore in the third quarter to September 2001. Although the current year has been a tough one for FMCG players due to the slowdown in the economy, Nirma’s consistent contraction in operating income for the third time in a row was not expected.

Yet a decline in operating expenses in tandem with income stemmed operating profit from falling sharply. It was down seven per cent to Rs 120 crore. However, higher interest cost of Rs 30 crore up from Rs 18 crore in the corresponding period of last year has resulted in a fall of 28 per cent in net profit to Rs 50 crore.

The commissioning of the second phase of its soda ash plant caused a hefty increase in interest cost as Nirma had incurred huge debt to finance this project.

The company has plans to increase further its soda ash manufacturing capacity at a time when the country is flush with excess production capacity. A large part of this project had to be financed through debt. This may have an adverse fallout on profitability in the future.

Nirma has lately been losing market to its rivals that are offering better products. The company may have to alter its marketing strategy to maintain its share in the market.

Hindustan Lever, its nearest rival, has, during the same
period, registered a growth of around eight per cent in
its soaps and detergents business. Even a small company such as Henkel Spic has been able to register a growth of 15 per cent in its operating income to Rs 82 crore. These competitors have been able to achieve this at the cost of Nirma’s market share.