Rough seas ahoy!

Beijing's measures to cool the Chinese economy could hurt the shipping industry

Great Eastern Shipping has improved its performance significantly in the quarter ended March 31, 2004. Net profit has vaulted 124 per cent to Rs 18.51 crore (excluding exceptional items). The bottomline has improved primarily due to a surge in freight rates.

In the dry bulk segment, freight rates were close to historic highs in the March quarter due to a surge in volume of iron ore and steel exported to China. As a result, net sales rose 73 per cent to Rs 462 crore in Q4FY04.

While the company's core operations have grown, costs have also shown signs of rising. Staff cost has jumped 34 per cent to Rs 43.4 crore and the repairs and maintenance bill has rocketed 92 per cent to Rs 43.52 crore in the March 04 quarter.

Analysts said this is expected as most factor inputs are in short supply "" to curb attrition, it would be necessary for the company to raise salaries and related expenses. Moreover, shipyards have raised their charges significantly for carrying out maintenance of ships.

However, rising net sales made up for the increase in supply chain costs. Operating profit darted up 90 per cent to 247.9 crore in March 04 and operating profit margins rose 420 basis points to 53 per cent.

Going forward, analysts don't expect freight rates in the dry bulk segment to remain at such high levels. Iron ore and steel exports from India to the Middle Kingdom are expected to fall due to Beijing placing a limit on imports of iron ore as part of its efforts to cool the country's red-hot economy.

Also, some Chinese buyers had failed to open letters of credit for Indian iron ore cargoes, which has already led charterers to slash rates. Company officials point out that they have entered into forward contracts with their clients and any immediate drop in freight rates would not have an impact on their earnings.

UTI Bank delivers

UTI Bank's operating profit for the quarter ended March 2004 rose 12.4 per cent, despite a 56 per cent fall in trading income. It's clear therefore that the bank has managed the transition to an environment where windfall capital gains will no longer be available. The question is, how did it manage this?

One offsetting factor was net interest income, which rose by 49 per cent, driven mainly by lower cost of funds. Net interest margins rose to 3.32 per cent, up 14 basis points from the margin in the immediately preceding quarter, thanks to a decline in the daily average cost of funds to 5.18 per cent, pushed down by a rising share of low-cost savings and current account deposits.

The other factor boosting operating profit was higher fee income, which increased 64 per cent compared with Q4 last year. These positives more than offset a 21 per cent rise in operating expenditure.

Provisions were about the same as in Q4 last year, and the reason for the higher 43.8 per cent rise in net profit was lower taxes. Commendably, in spite of the move to the 90-day non-performing asset (NPA) recognition norm, net NPAs as a proportion of net customer assets dropped to 1.03 per cent, compared to 1.45 per cent as at end-December. Provisions as a percentage of gross NPAs amounted to 57.4 per cent as at end-March.

Advances have also been a driver of net interest income, though not to the same extent as lower costs. Advances increased 30 per cent year-on-year, and retail advances accounted for 44 per cent of the growth.

But to keep the results in perspective, it needs to be pointed out that while y-o-y growth in operating profits was 12.4 per cent, it was 67.35 per cent for the full year FY2004. Clearly, a return to windfall profits of the past few years is not on the cards.

Although the results have been good, it does appear that the numbers have already been priced into the UTI Bank scrip, which has risen sharply since HSBC took a stake in the bank, doubling from around Rs 80 to the current level of about Rs 160.

With contributions from, Amriteshwar Mathur