An operating profit of Rs 103.47 crore for the first quarter, compared with Rs 241.78 crore in the corresponding period of 1997 may seem dismal. But the stock market has reacted positively to the news, pushing up the Telco stock. This is because, market expectations of an operating loss were belied.

The wretched business conditions that plague the commercial-vehicle segment have taken their toll on Telco. This is mirrored in the 40.7 per cent dip in unit sales for the first quarter. Net sales for the first quarter also dropped 31.73 per cent. Revenues were buoyed to some extent by a 13 per cent improvement in exports.

While the company's 50.19 per cent drop in production to 25,803 units at first glance looks abysmal, one has to consider that though the slowdown in offtakes began last year, Telco cut production only in the second half of 1997-98. Therefore, Telco's production figures will look better in the second half of the current year than in the first half.

Operating margins dippedfrom 12.92 per cent to 8.09 per cent. The dip in margins would have been even higher had it not been for the company's improved product mix, which tilts more towards the higher-margin utility vehicles - the Sumo and the Safari.

Higher depreciation and interest charges have further eroded earnings. With the slowdown in offtakes set to continue, there are no signs of any recovery in the first half of 1998-99. In fact, there is bad news in the form of the recent excise hikes in multiutility vehicles and tyres. The increase in the CR import duty could further squeeze margins. Lastly, with the Mint likely to achieve a breakeven only at around 60,000 units, Telco could well have to absorb losses for it for the next two to three years.

State Bank of India

The publication of SBI's balance sheet shows that even the 3.15 per cent increase in operating profits in 1997-98 has been due to other than operational factors. Take for example the fact that SBI saved over Rs 200 crore on account of insurancecharges. Insurance charges amounted to Rs 265 crore in 1996-97, and Rs 255 crore in 1995-96.

In 1997-98, however, the charges amounted to Rs 60 crore, as the bank decided to exit from the DI&CGC Small Loans guarantee scheme during the year. While the savings on account of DI&CGC premiums will continue, the bank should have done much better in 1997-98 with the savings on the insurance premium. Another factor contributing to the higher profit was the profit booked from the sale of investments. This profit amounted to Rs 115 crore during 1997-98, compared with Rs 25 crore in the previous year.

Interest expended on account of "others", that is, on bonds, etc, fell sharply by over Rs 400 crore, perhaps on account of the redemption of the India Development Bonds. Considering that the increase in operating profit disclosed during the year was only Rs 107.34 crore, the extraordinary factors mentioned indicate that the bank's operational performance during 1997-98 was much worse than in the preceding year.Although the provision towards bad loans in 1997-98 includes the portion earmarked for loans guaranteed earlier by the DI&CGC, it must be remembered that the bank had already kept aside Rs 145 crore in 1996-97. Seen in this backdrop, provisions for bad debts have increased substantially during 1997-98. These features of the bank's working in 1997-98 should have been provided by the management at the time of declaring its profits for the year.

The primary reason for the lacklustre performance was that the interest income from advances fell to Rs 7,829 crore during the year, against Rs 8,137 crore during 1996-97. This was in spite of the outstanding advances increasing from Rs 62,233 crore to Rs 74,237 crore. The interest earned on average advances was 11.5 per cent for 1997-98, compared with 13.3 per cent during 1996-97. However, these yields need to be taken with a pinch of salt, since much of the rise in advances occurred towards the end of 1997-98, when the Reserve Bank's decision to signal a hike ininterest rates sent borrowers scurrying to pick up funds. The yield on average deposits fell marginally, from 8 per cent in 1996-97 to 7.9 per cent.

The proportion of term loans in the bank's advances' portfolio has increased sharply. While it was 24 per cent of advances as on March 1996, it increased to 27 per cent next year. As on March 31, 1998, it was 30.6 per cent. SBI's policy of keeping long-term loan rates lower than its short-term rate has backfired.

This problem was rectified to an extent by a higher yield on the bank's investment portfolio. For 1997-98, the yield on average investments amounted to 12.6 per cent, compared with 12.2 per cent in 1996-97. This was mainly due to a sharp increase in investment in debentures and bonds.

The bank has also increased its presence in leasing significantly. While outstanding leased assets as at end-March 1998 amounted to Rs 372 crore, these were only Rs 170 crore a year earlier. The silver lining for SBI was the NPA position, which improved significantlyduring the year. A prudential provision of 0.25 per cent of standard assets, over and above the requirements of the RBI guidelines, was also created during the year.

The bank's first-quarter results this fiscal owed much to higher "other income", while returns from higher call-money rates also helped. The declining trend in interest-rate spreads seems to have been reversed.

(With contributions from Percy Dubash)