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PNB Gilts: Interest rates benefits

Apr 25, 2002

PNB Gilts reported strong performance for the full year ended March 2002 with a 139% growth in profits and 48% net profit margins. The company's operating profits also doubled due to lower interest cost and operating expenses. However, on a sequential basis, its earnings in the fourth quarter dropped by 24%. On a YoY basis the company's financials are not comparable due to significant changes in interest rates during the last one year.

(Rs m)3QFY024QFY02ChangeFY01FY02Change
Income from operations 741 551 -25.6% 2,222 2,327 4.7%
Other Income 1 9 762.6% 25 17 -29.9%
Interest expense 133 73 -45.4% 1,346 506 -62.4%
Net interest income 607 478 -21.3% 876 1,820 107.7%
Other expenses 18 25 34.5% 44 75 70.3%
Operating Profit 589 453 -23.0% 832 1,745 109.7%
Operating Profit Margin (%)79.5%82.3% 37.5%75.0% 
Provisions and contingencies - -   50 -  
Profit before Tax 590 462 -21.7% 807 1,763 118.5%
Tax210172-17.8% 336 63789.3%
Profit after Tax/(Loss) 380 290 -23.8% 471 1,126 139.3%
Net profit margin (%)51.3%52.6% 21.2%48.4% 
No. of Shares (m) 135.0 135.0   135.0 135.0  
Diluted Earnings per share*11.38.6 3.58.3 
P/E Ratio 2.4  2.5 

The company achieved a turnover of Rs 1,060 bn for FY02 from outright sale and purchase of fixed income securities in both primary and secondary markets. Its turnover in the debt market witnessed a 26% rise in the fourth quarter from Rs 842 bn as on December 2001. PNB Gilts trades aggressively in the debt market, which has enabled it to improve its turnover over the last one year. Also, its initiatives to focus on retail segment of the market, which is yet to take-off, is likely to increase its market share in the coming quarters.

Revenues from G-Secs accounted for 86% of its total revenues and 7% of revenues were from corporate bonds. The company's revenues however grew by a marginal 5% due to short duration of its portfolio. During the year, the company changed its business strategies & undertook aggressive trading, which reduced the average holding of stock & thereby led to low cost of borrowings. This coupled with low cost to income ratio of 4%, fueled the company's operating profits to Rs 1.8 bn. Its business operational cost, which accounts for 21% of other expenses witnessed a decline of over 200% in FY02.

At the current market price of Rs 21, PNB Gilts trades on a P/E of 3x and Price/Book value ratio of 0.7x. During the year, the company declared dividend of 24%, implying a dividend yield of 11.4% (after tax dividend yield of 8%). The company's low valuations are the result of inherent risk involved in the business of primary dealers from interest rates. Any adverse movement in interest rates is likely to impact the company's performance.

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