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State Bank of India: Volatile earnings save the day

Sachchidanand Shukla & Dhruv Rathi

State Bank of India’s results during the quarter to September 2001 were on expected lines, as its earnings grew nearly 11 per cent to Rs 644 crore on a topline growth of 19 per cent on expected lines. However, its topline and operating profits that have been lower than in the immediately preceding quarter, besides a contraction in spread, bear out the signs of a slowdown.

As was the case during the first quarter, SBI’s fund - based income that rose 20 per cent to Rs 7,433 crore received a boost yet again from interest on investments and income on RBI balances. Interest income from investments was higher at Rs 3,577 crore, rising by 33 per cent than interest from advances or bills that contracted by two per cent to Rs 2,837 crore. Interest on RBI balances at Rs 755 crore up 160 per cent was a breather.

Also, growth in average level of domestic advances during the first half of the fiscal was lower at 9.18 per cent (23.79) despite average deposits (excluding RIB and IMD ) that grew by 16.8 per cent.
Average yield on advances declined marginally to 10 per cent (10.3 per cent) leading to a higher investment portfolio. Other income rose by a moderate 12 per cent to Rs 1,013 crore largely owing to profit on sale of investments and ‘all other income.’

Cost of deposits was lower at 7.2 per cent (7.5 per cent) yet, interest expenses rose a high 25 per cent to Rs 5,256 crore. As a result, net interest earned to total interest earned ratio slumped by 328 basis points (bps) while the spread contracted to 2.8 per cent (3.2 per cent). OPM rose 85 bps owing to a subdued rise in operating cost through a contraction in staff cost. Net profit grew nearly 11 per cent to Rs 644 crore despite a rise of 48 per cent in provisioning and 31 per cent higher tax provisioning.

Credit offtake normally is better during the second half of the fiscal. But, the recent rate cuts will lead to lowering of PLR. SBI’s bottomline will take a hit if it fails to offset it with higher portfolio incomes. Moreover, higher earnings through sale of investmenst add to the volatility in earnings, as it may not come to the rescue always.

Wockhardt
Wockhardt’s results in the third quarter to September 2001 do not match its earlier performance. Net sales increased by 12.6 per cent to Rs 172.4 crore. Only 17 per cent of sales revenue comes from DPCO price controlled drugs. Slack demand, lower prices of hepatitis-B vaccines, aggressive marketing by competitors, new entrants and increasing competition in most of the therapeutic segment restricted price and volume increase for the company.

However, it managed to push the sale of high margin products more aggressively. Staff costs went up by 60 per cent to Rs 12.4 crore, despite tight control on total expenses. Operating profit increased by 36 per cent to Rs 39 crore. Export growth of 29 per cent to Rs 39 crore also contributed to a sharp increase in operating profit. OPM improved from 18.6 per cent to 22.5 per cent. Net profit increased by 31.5 per cent to Rs 29.6 crore.

R&D expenses account for 7 per cent of sales. R&D efforts are directed towards new drug discovery research (NDDR) as well as novel drug delivery system (NDDS). The company filed 15 patents last year. The company is working on new chemical entities (NCE) and off-patent generics, besides in the bio-technology areas with its joint venture with Rhein Biopharm Ltd for DNA recombinant bio-pharmaceuticals. It has successfully developed and commercialised hepatitis-B vaccines.

The company hopes to benefit from the introduction of DNA recombinant Erythropoietin in the brand name of Epox, effective against anaemia caused by renal failure and cancer. There are 5 more products in biotechnology segment likely to be introduced in next 2-3 years.

The product mix keeps on changing as Wockhardt consistantly restructures its product line. The company has diversified and expanded in more therapeutic segments.

Formulations account for 78 per cent. Anti-infectives and pain management drugs account for more than 50 per cent of domestic turnover.

The company foresees higher growth in new molecules like Sparfloxacins, Ofloxacin (quinolones), Azithromycin (macrolides), Ceftriaxone (third generation Cephalosporins).