PNB Gilts: Facing tough times - Views on News from Equitymaster

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PNB Gilts: Facing tough times

Aug 27, 2002

With increased volatility in debt markets during the first quarter of FY03, PNB Gilts reported a net loss of Rs 98 m as against profits of Rs 462 m in the previous quarter. On YoY basis, the company's financials are not exactly comparable due to significant changes in interest rates during the last one year.

 QoQ YoY 
(Rs m)4QFY021QFY03Change1QFY021QFY03Change
Income from operations 551 121 -78.0% 618 121 -80.4%
Other Income 9 4 -53.2% 3 4 24.7%
Interest expense 73 201 176.0% 159 201 26.8%
Net interest income 478 (80)- 460 (80)-
Other expenses 25 15 -38.7% 12 15 23.5%
Operating Profit 453 (95)- 447 (95)-
Operating Profit Margin (%)82.3%-78.4% 72.4%-78.4% 
Provisions and contingencies - - - - - -
Profit before Tax 462 (91)- 451 (91)-
Tax - 7- 161 7-95.7%
Profit after Tax/(Loss) 462 (98)- 290 (98)-
Net profit margin (%)83.8%-80.8% 46.8%-80.8% 
No. of Shares (m) 135.0 135.0   135.0 135.0  
Diluted Earnings per share*13.7-2.9 8.6-2.9 
P/E Ratio -  - 
*(annualised)      

During the quarter, the company's revenues from G-Sec (55% of total revenues) dropped by 87% YoY (QoQ figures are not available). The government securities market witnessed volatile yield movements during the quarter. Yields on 10 year G-Sec paper declined by 41 basis points to 6.9% during the period March 31, 2002 to April 5, 2002. However, an open market operation (OMO) by RBI to the tune of Rs 50 bn, at yields higher than prevailing market yields, in second week of April '02 curtailed the further decline in yields. Secondary market volumes also fell down to Rs 18 bn during mid May 2002 from Rs 68 bn in the first week of April 2002. OMO by RBI at higher yields, co-operative bank scams, worsening border siuation and possible increase in goverment borrowings, pushed up yileds on 10 year paper to 8.2%. With increase in yields, prices declined and consequently, PNB Gilt reported dimunition of Rs 271 m in the marekt value of its securities (85% of capital employed is invested into G-Sec).

The G-Sec market however, started reviving beginning June 2002. Interest rates started softening again with CRR cut, ample liquidity in the system, poor credit offtake and absence of good quality assets for banks. Yields on 10 year paper declined by over 80 basis points to 7.4% in the month of June 2002. A 25 basis points cut in repo rate to 5.75% on June 27, 2002 was another indicator from RBI for a softer interest rate regime, which could help the company in improving its volume growth in the current quarter. While revenues from G-Sec declined, PNB Gilts' income from corporate bonds jumped by 32% YoY, forming 34% of total revenues. The higher growth in revenues is due to a sharp decline in corporate bond yields over the last one year.

The company's interest cost rose both on QoQ and YoY basis on account of its higher borrowings to fund larger portfolio. Its average cost of borrowings however, declined to 6.4% during the current quarter from 7.1% in 1QFY02. The fall in cost of borrowings was mainly in line with reduction in interest rates in general. To reduce the cost further, PNB Gilts' is resorting to interbank repo market where funds are available at 20-30 basis points below call money levels. The company has also reduced its dependence on borrowings from RBI.

To generate higher revenues, PNB Gilts is foraying into new related business areas with increased marketing initiatives. As on June 2002, its client base was 1,972, which it aims to increase to 2,500 before the year end. This rise would be mainly from increasing number of provident fund and co-operative bank clients. It has started providing portfolio advisory services to these clients. PNB Gilts' also aims to expand its portfolio into new debt market products including STRIPS, mortgage backed securities and deep discount bonds.

At the current market price of Rs 19, PNB Gilts trades on a P/E of 3x FY02 earnings and price to book value ratio of 1x. 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 negatively impacts the company's performance, which is reflected in the June quarter financials.

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