IDBI: Hold

Recommendation: Hold

Sanjiv Shankaran

THE performance of the Industrial Development Bank of India (IDBI) in the second quarter (July-September) of this financial year indicates the company facing the prospect of shrinking profit margins following a decline in the operating income.

The operating income, primarily interest and discount income accruing from lending operations, was affected by the soft interest rate regime in the recent past. The operating income for the second quarter was Rs 1,917 crore, down by Rs 6.2 crore compared to the corresponding previous period. The `other income' too fell in the second quarter to Rs 38 crore from the earlier Rs 48 crore.

For a financial intermediary such as the IDBI, interest expense is a major outgo. The interest expenditure increased marginally (4.03 per cent) during the second quarter to Rs 1,648 crore.

A tight control on interest expense will be crucial to protecting profit margins in the backdrop of increasing competition in the financial sector. In this context, the IDBI has begun to call back a few bond issues made during the high interest environment of the mid-1990s. The move to redeem high interest bonds should have a positive impact on the profitability.

The IDBI's operating profit for the second quarter was Rs 290 crore, lower by Rs 78 crore (21.19 per cent) compared to the corresponding previous quarter. The full effect of a marginal decline in operating income and an increase in the interest expenditure was captured by the steep fall in operating profit.

The effect on the operating profit margin was dramatic. It fell to 14.85 per cent in the second quarter of this year from 18.68 per cent in the corresponding previous period. Expenditure, such as staff cost, increased marginally to Rs 72 crore in the second quarter of the corresponding year.

IDBI's net profit for the second quarter of this financial year dropped to Rs 165 crore, down by Rs 40 crore (19.69 per cent) compared to the corresponding previous period. The net profit margin for the second quarter of this year dropped to 8.42 per cent from the earlier 10.42 per cent.

IDBI's equity share capital decreased during the year, following the Government's decision to convert 247 million equity shares into 247 million fully paid-up redeemable preference shares, carrying a dividend of 13 per cent per annum. The move follows the IDBI's attempts to improve the company's equity market valuation.

At the same time, to survive in an environment where different categories of financial intermediaries have begun to compete head-on, the IDBI is positioning itself as a one-stop financial supermarket.But what may actually influence the share price is the success of the sectors where the company has major exposure -- steel and petrochemicals, for instance. With the steel industry showing some signs of improvement, the prospects do not appear far too bleak for shareholders with a long-term perspective.