Sustainability of LIC HF quarterly show in doubt- 18th January 2008

18th January 2008

Bakul Chugan & Ramkrishna Kashelkar

Sustainability of LIC HF quarterly show in doubt

SETTING aside fears of a slowdown in the housing market, LIC Housing Finance reported a strong 38% Y-o-Y growth in its net profit for the quarter ended December 31,2007. The company’s net profit crossed Rs 100 crore aided by a 35% growth in income from operations to Rs 534 crore on a Y-o-Y basis. While the topline growth has been more or less in line with that in the previous quarter, net profit has taken a beating by nearly 15%. This is on account of the sequential dip in topline as well as bottomline growth.
According to the management, gains from a steady increase in home loan rates, which were available in the first half of FY08, may not be available from Q4 onwards. Also, an increase in provisioning and adspend have hit profit margins this quarter. The company has, till date, incurred an ad expenditure of Rs 20 crore, of which Rs 10 crore was incurred in December quarter alone.

While the industry’s operating profits are generally at the mercy of interest rates, LIC Housing has maintained its growth momentum in income from other sources. This includes the processing fees and income from investment in mutual funds. This raises doubt about the sustainability of these returns.

The company has also pared its non-performing assets (NPA). While gross NPA is down to 2.8% from 3.6% Y-o-Y, the net NPA stood at 1.6% as of December 2007. The management successfully used the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (Sarfaesi Act), to recover Rs 243 crore of doubtful debts. The company is now targeting gross NPA of less than 2% and net NPA of less than 1% by end of March 2008.

On the growth front, the company intends to raise capital of Rs 300-400 crore to lower its debt-equity ratio and meet future capital requirements. The same will be raised by way of preferential allotment to promoters and FIIs. Having consolidated its position in the housing loan market, the company now intends to expand its business and is in the process of launching an realty fund in the next financial year.
Margin play puts MRPL on top
Mangalore Refinery and Petrochemicals (MRPL), India’s leading standalone refinery, came out with better-than-expected December quarter results. The company’s net profit nearly tripled to Rs 350 crore. The growth was driven by improvement in gross refining margins (GRMs), which rose to around $7.7 per barrel as against a mere $1 in the December 2006 quarter. Gross refining margin is the differential between the cost of crude oil and the realisation from sale of refined products.

The quarter witnessed higher margins for the refiner on diesel and naphtha. The numbers provide a broad direction as what to expect from other petroleum refining companies, when they publish their quarterly results later. MRPL’s topline during the period grew 11%. The company could process only 3.02 million tonne of crude, which was 10% lower compared with the 3.36 million tonne processed during the December 2006 quarter. The loss of production was caused by a 25-day maintenance shutdown at its hydro-cracker and hydrogen generation units.

Substantial expansion of margins doubled MRPL’s operating profit. Other income more than halved, but a drop in interest costs helped the company more than double its pretax profits. A fall in the effective tax rate also helped in the PAT spurt. Profit growth was also aided by sale of value-added products such as mixed xylene and crumb rubber modified bitumen (CRMB).
Going forward, MRPL will benefit from its full refining capacity. However, it is too early to guess how the refining margins will behave in the coming months. While the Asian market remains comfortable, the US market is showing signs of weakness in GRMs. It is not yet clear whether the weakness could extend to other regions in the future.