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PNB Gilts: A dividend yield play?

Mar 22, 2001

PNB Gilts came out with an IPO at a price of Rs 30. The company made a debut at a price of Rs 16 on September 22, ’00 on the BSE. Since then the price has touched a high of Rs 23.7 on March 1, ’01 due to reforms announced in the budget for the debt markets. The company currently trades at a price of Rs 16.4, a discount of more than 45% compared to its issue price.PNB Gilts, a subsidiary of Punjab National Bank, was set up in 1996 and is the only listed company operating in the debt markets. In a time frame of less than four years, the company established a strong position in the debt markets, commanding a share of 8% (debt market including banking system). Volumes in the debt market too increased substantially from around Rs 4,000 bn in FY00 (4 times higher than previous year) to around Rs 5,000 bn in the current year. As the awareness of the people increases, liquidity is expected to improve further.

PNB Gilts is a primary dealer which carries on the business of discounting, rediscounting, buying, acquiring and dealing in primary or secondary markets of any securities, bonds, notes, bills, debt instruments, money market instruments and all other marketable papers & securities issued by the government. It also earns from the businesses of undertaking and executing buy-back, including repurchase arrangement, put & call options and forward contracts in any of the securities and other instruments.

The company has a wide client base including banks, provident funds, pension funds, charitable trusts, insurance companies, other primary dealers, corporates and individuals. It offers a range of products and services catering to each individual customer segment. PNB Gilt’s strong research department ensures the smooth conduct of business operations.

The outlook for primary dealers seems bright due to the rise in government borrowings, statutory requirements for banks investments in G-Secs as stipulated by RBI, increasing trading volumes and increasing market participants in the debt market.

Snapshot of financials
(Rs m)3QFY003QFY01Change9m FY009m FY01Change
Interest from operations 1,110 431 -61.1% 1,677 1,463 -12.8%
Other income 15 5 -64.1% 22 23 4.0%
Total income 1,124 437 -61.2% 1,699 1,486 -12.6%
Operating expenses 15 11 -26.7% 30 26 -12.5%
Interest expense 592 343 -42.1% 928 1,074 15.8%
Gross profit before dep. & tax 517 83 -83.9% 742 386 -48.0%
Depreciation- Fixed Assets 1 1 -25.0% 2 3 47.4%
Depreciation-Securities - (619)  - 73  
Profits before tax 516 701 35.9% 740 310 -58.2%
Tax 280 121 -56.7% 280 121 -56.7%
Profits after tax 236 580 145.5% 460 188 -59.1%
Profits excluding write back 236 (39)-116.4% 460 262 -43.1%
No. of shares (m)100135 100135 

Key ratios
Partiiculars9m FY009m FY01
Gross profit margin43.7%26.0%
Tax / PBT37.8%39.1%
Net profit margin27.1%12.7%
EPS (Rs)6.11.9

Financials of PNB Gilts are not strictly comparable over the previous year (due to write offs and nature of business). As is evident from the above financial table, there has been a huge write back of depreciation on securities for the nine months ended December ‘00. With a rate cut by the RBI and the IMD funds fuelling the deposit base of banks, the company’s bottomline is expected to see a one time spurt for the fourth quarter of the current fiscal.

At the current market price of Rs 16.4, PNB Gilt is trading at a P/E of 8 times its 9 months FY01 annualised earnings and a Price/Book value ratio of 0.7 times. The low valuations of the company are a result of inherent risk involved in the business of primary dealers from interest rates. If the interest rates moves up it may result in a loss on the trading stock of the company due to depreciation in the value of securities held by it. Also gilt markets are sensitive to changes in the macro economic factors. The company has however, mitigated this risk through a well-defined risk management system. As a business strategy it has high turnover of its portfolio of securities with holding period of around 15-20 days.

PNB Gilt has a consistent track record of dividends payouts in the range of 15-20%. If the company were to maintain the rate of 15% for the current year than based on the current price, the dividend yield also works out to be attractive 9%, and that too tax-free.

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