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PNB Gilts: Interest rate play

Jul 5, 2001

PNB Gilts, a frontrunner in the government securities market has reported 68% jump in 4QFY01 profits. Favourable interest rate scenario has fueled the profit growth of the company.

(Rs m)FY00FY01Change4QFY004QFY01Change
Interest Income 2,339 2,222 -5.0% 662 833 25.7%
Other Income 24 25 2.1% 2 1 -18.6%
Interest Expenditure 1,260 1,346 6.8% 333 272-18.4%
Operating Profit (EBDIT) 1,079 876 -18.8% 330 561 70.2%
Operating Profit Margin (%)46.1%39.4% 49.8%67.4% 
Other Expenditure 41 90 121.0% 11 14 26.8%
Profit before Tax1,062811-23.7%32054871.2%
Depreciation 4 41.3% 2 1-43.3%
Tax 401 336-16.1% 121 21577.8%
Profit after Tax/(Loss) 658 471 -28.5% 197 332 68.4%
Net profit margin (%)28.1%21.2% 29.8%39.9% 
No. of Shares (eoy) 100 135   100 135  
Diluted Earnings per share*4.93.5 5.89.8 
P/E (at current price) 5.1  1.8 

PNB Gilts currently offers various products including treasury bills, central and state government securities, PSU bonds, commercial papers, bill re-discounting and call money operations. It is the only listed company operating in the debt markets with turnover of Rs 33 bn. The company has a wide client base including banks, provident funds, pension funds, charitable trusts, insurance companies, other primary dealers, corporates and individuals.

FY01 started on a negative note for the company. Sharp increase in the international oil prices and continuous depreciation in rupee forced the RBI to increase bank rate and CRR. As a result, the company's financials took a hit in the first half of the year with increase in interest rates leading to a sharp fall in the prices of government securities, and volatility in the call money market. PNB Gilts had incurred a loss of Rs 392 m in the first half due to diminution in the value of securities.

PNB Gilts was also affected by Madhavpura Cooperative Bank scam. It had lent an amount of Rs 100 m in the call money market to the bank, which is still overdue. The company is initiating measures to recover the amount. However, in the absence of complete information and clarity of position in this regard a provision of Rs 50 m has been made by the company.

The second half (particularly 4QFY01) has however provided windfall gains to the company. Its operating profits soared by 70% backed by falling interest rates scenario. The RBI has already signaled lower interest rate regime going forward. This is positive for the company as with a fall in interest rates, gilt prices rise.

At the current market price of Rs 18 PNB Gilts is trading at a P/E of 5x and Price/Book value ratio of 0.7x FY01 earnings. The company has declared 18% dividend in the current year, which works out to a tax free dividend yield of 10.2%. It has a track record of paying dividend in the range of 18% - 22% in the last four years. The company's future performance is dependent on interest rate scenario. Although, the current trend is southward, a stable or a slight rise in rates could adversely affect financials to a certain extent.

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