Financial Daily from THE HINDU group of publications
Sunday, Nov 24, 2002
Financial Daily from THE HINDU group of publications Sunday, Nov 24, 2002 |
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Investment World
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Stocks Markets - Recommendation Money & Banking - Stocks PNB Gilts: Hold Sanjiv Shankaran
PREDICTING the trend in interest rates is difficult at the least. The importance of the measure to the economy, however, ensures that a large number of people are engaged in predicting interest rate movement. One company that does it diligently is PNB Gilts, a primary dealer in debt securities, because its success is intertwined with interest movement, and a wrong call can cost it dear. The July-September quarter of the current financial year has been kind to PNB Gilts. The gradual slide in interest rate, and the consequent rise in government securities' value, has led to a marked growth in PNB Gilts' profit. The company's profit after tax in the July-September quarter was Rs 30 crore (Rs 17 crore). The share price trend reflected the good financial performance — a gain of about 15 per cent over the last three months to currently hover around Rs 21.50. PNB Gilts' job is to act as intermediary for entities that desire to trade in government securities. Since the business requires the company to hold a large quantity of securities as inventory, profit through trading in the same has a marked impact on profit. At the moment, bulk of the company's revenue comes from trading profit and interest on securities it holds. Therefore, PNB Gilts' performance really hinges on interest rate movement. A slide — as seen in the last couple of months — can have a positive impact on its performance. PNB Gilts' business does not carry the same kind of risk as a financial intermediary that on-lends — a bank, for instance. The company has to combat a different kind of risk. For instance, two years ago, a sudden spike in interest rates led to a sharp decline in the value of its inventory of securities, and necessitated a huge provision. The upshot was that PNB Gilts' good performance in one quarter collapsed into a loss in the next. The underlying business risk has an impact on the stock. The stock can be subject to sharp fluctuations because of a sudden change in the fortune of the underlying business. The business volatility can cast a shadow on the company's equity valuation.
The last quarter has been good to PNB Gilts. Signs are that the interest rate level may be sticky at the current level.
Therefore, PNB Gilts' performance in the coming quarter may be reasonable and shareholders may consider staying invested. The volatility associated with the business, however, may cap a big rise in the share price. Therefore, fresh investments may be avoided. Shareholders may use a rally from the current level — about 10 per cent — as an exit indicator. Business risk may make it imprudent to stay on longer.
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