Telco unfortunately reported a worse performance with production falling by 57 per cent in the first quarter. Though the slowdown began last year, Telco was slow to react, and production was cut only in the second half of 1997-98. Therefore, Telco's production figures will look better in the second half of the current year than in the first half, as the comparable figures will be realistic. Ashok Leyland, on the other hand, began production cuts much earlier last year, and so its fall in production looks less daunting.

The general feeling in market circles is that Telco is likely to report an operating loss for the first quarter, and this has resulted in selling ahead of the announcement of its results. But asa point of caution, it must be recollected that Telco's annual results were announced only towards the end of the first quarter, and the company had announced a dividend of 55 per cent, which involved an outflow of Rs 140 crore.

Now, why would the company risk drawing down its earnings to pay a dividend at a time when business is running up an operating loss. The signal the management sent out by pruning the dividend was one of caution and the result of a fall in earnings in a bad year, but the fact that dividend was paid is an indication the stock is not fairly reflective of the facts.

SBI displays resilience: Unlike the previous year, without taking recourse to lower provisioning norms, both private and public-sector unit (PSU) banks as well as financial institutions have shown a qualitatively better performance. This fact has been overshadowed by the depressed sentiment in the stock markets and even the State Bank of India (SBI) stock has barely managed to show some strength after its improvedfirst-quarter performance.

At the time of its annual results, the stock reacted very badly despite the bank having declared record profits. But the reality then was that there was little growth in its profit before provisions and contingencies. The lowering of the yield-to-maturity (YTM) for securities enabled banks to write back provisions for the year.

For the current year, there were fears the YTM would increase by at least 100 basis points, forcing banks to provide for additional depreciation on their securities portfolio, thus affecting profits for the year. But the reality may be somewhat different. There is a growing belief that the Reserve Bank of India may restrict the rise in the YTM between 50 and 75 basis points, thereby blunting the effect of increased depreciation provisioning.

In SBI's case, the estimated charge on this account is Rs 250 crore for the year and the bank has made proportionate provisions for the first quarter. Qualitatively, the earnings before depreciation and tax havebeen better considering that the other-income proportion has been lower than the previous year's first quarter.

But within the other-income figure, the proportion of profit on sale of investments are estimated to be higher than the previous year's, and to that extent skews the performance a little. The bank does not disclose the exact figure of profit on sale of investments.

A worrying factor that emerged from the first-quarter results is that the bank struggled to grow its loan portfolio and the interest-income growth has been slower, and it is unlikely there will much improvement for the rest of the year. Two other major public-sector banks will be announcing their first-quarter results on July 29, which should clearly indicate the trend of earnings amongst banks.

Private-sector banks, like IndusInd Bank, have shown some improvement. There has been more reliance on growth in interest income through increased volumes as well as through higher treasury income, and not much reliance on increases throughprofit on sale of investments, as was the case last year. However, the threat to the profits of the private-sector banks is that larger commercial operations will also mean higher provisions for bad debts as the year progresses, especially if the economy continues to grow at a snail's pace.