Taking a cue from the profit warning issued by the P&G management, other FMCG stocks have begun to show a little weakness. This warning comes on top of a slowdown in profit growth shown by Hindustan Lever for the first half ended June 1998, where the rate of change of its earnings was lower than the rate of change in the previous year and was out of synchronisation with the change in its price-earning multiple.

In addition to the topline growth of 13.7 per cent and a net income growth of 32 per cent, the payout ratio has been stepped up to 37.5 per cent from 32 per cent last year. This was accounted for by the dividend rate being maintained at 75 per cent despite the 1:2 bonus ratio issued by the company last year. The performance, mainly the hike in dividend, justifies the popularity of the stock in the aftermath of last year's mediocre financial performance (especially after the bonus). But the stock has dipped by about 6 per cent after the announcement of the results late last week, and following the profit warning from the company, the downward trend has accelerated this week.

RIBs

The Resurgent India Bonds (RIBs) issue has closed with a resounding success for the State Bank of India, but it has attracted very little interest in the market as far as the stock is concerned. The reason is that the bonds meet a very short-term national objective of building forex reserves and bringing down short-term interest rates. The worry in the marketplace is obviously the cost the government will have to bear in servicing these bonds in terms of the depreciation in the rupee (the risk of fall in value of the currency lies with the government). In the last one year alone, the rupee has depreciated by 17 per cent, while the government seems to have factored in an annual depreciation of 5 per cent.

For the State Bank of India, the returns it will earn on the bonds appear to be attractive but for one rider. While the bank stands to make a decent spread (despite SLR and CRR requirements, which should pose no threat to its earnings as it already holds gilts in excess of its present SLR requirements), net earnings, which could be in the region of Rs 75 crore, could easily be eclipsed by the disturbing rise in NPAs the banking sector has been experiencing as a whole. By and large, the SBI stock has been reflecting this negative sentiment, despite the appreciation in the last couple of days.

Jyoti

Jyoti Ltd, a small engineering company, has been making steady progress through the rough patch the Indian engineering goods sector has been passing through for the last couple of years.

Despite having the profits and resources, the company chose to skip a dividend payment owing to the need for funds within the business. There have been additions made to its physical assets and there has been an improvement in operating parameters. Profit before tax has improved by 77 per cent, but write-offs on account of gratuity provisions (accounted for on an accrual basis) ate into a large chunk of profits, which resulted in the profit after tax for the year actually declining by 25 per cent.

In addition, the company managed to grow while reducing its balance-sheet size and improving its cash flows at the same time, basically by reducing the working-capital requirement. Against a book value of Rs 28, the stock trades at less than one quarter of that. Probably with an eye on its prolonged undervaluation, for the first time, the management has introduced a special resolution seeking permission for share buyback as and when the elusive amendment is appended to the companies act by the government.