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Hindalco: Copper comes to party! - Views on News from Equitymaster
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Hindalco: Copper comes to party!
Jan 25, 2007

Performance summary
The flagship company of the Aditya Birla Group, Hindalco, has reported an impressive performance for the quarter ending December 2006. With the commodity cycle strengthening further during the quarter, the company has reported a 62% YoY surge in net sales and 92% YoY increase in net profits. Expansion of operating margins by 210 basis points (2.1%) and higher other income (35% YoY rise) has led to a robust 91.5% YoY growth in net profits.

Financial performance snapshot
Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net Sales 28,727 46,562 62.1% 77,391 135,641 75.3%
Expenditure 22,897 36,109 57.7% 60,638 105,990 74.8%
Operating Profit (EBDITA) 5,830 10,453 79.3% 16,753 29,651 77.0%
EBITDA margin (%) 20.3% 22.4% - 21.6% 21.9% -
Other income 433 584 34.9% 1,696 2,468 45.5%
Interest 628 698 11.1% 1,628 1,847 13.5%
Depreciation 1,314 1,384 5.3% 3,768 4,805 27.5%
Profit before tax 4,321 8,955 107.2% 13,053 25,467 95.1%
Tax 989 2,516 154.4% 2,791 7,037 152.1%
Profit after Tax before extraordinary items 3,332 6,439 93.2% 10,262 18,430 79.6%
Extraordinary items 30 - - 30 - -
Profit after Tax 3,362 6,439 91.5% 10,292 18,430 79.1%
Net profit margin (%) 11.7% 13.8%   13.3% 13.6%  
No. of Shares (m) 928 1042   928 1042  
Diluted earnings per share         23.7  
Price to earnings ratio (x)         7.4  

What is the company’s business?
Hindalco, an AV Birla Group company, is India’s largest aluminium producer and has the distinction of being one of the lowest cost producers of the metal in the world. It is an integrated player, having captive bauxite mines, power units and high value-added output comprising semi-fabricated aluminium products. Its integrated operations and operating efficiency have positioned the company as Asia's largest integrated primary producer of aluminium and among the most cost efficient producers globally. Its copper smelter is today the world's largest custom smelter at a single location. The company has a significant market share in all the segments in which it operates. It enjoys a domestic market share of 42% in primary aluminium. The company also has a significant presence in the copper segment, which contributed 53% of the company’s revenues in FY06.

What has driven performance in 3QFY07?
Copper drives topline growth: The topline of the company increased by 62% YoY for 3QFY07 as compared to corresponding quarter last fiscal on the back of strong LME prices coupled with higher utilisation levels and focus on value added products. Value added production as a percent of total primary metal production was at 67 % during 3QFY07 vis-a-vis 59% during 3QFY06. The highlight of the quarter was the impressive performance of the copper division where revenues escalated by a huge 119%. Production of copper cathodes increased by 65% and revenues were higher by a huge 184%, indicating the buoyancy in the business. Apart from better realisation, improved operational performance helped company report strong numbers. The company operated at high utilisation levels and above their rated capacities. The company’s growth would have been much better but for the dismal show of the alumina business. The production of alumina was tad lower by 0.2% YoY, while sales tonnage decreased by 44% YoY. The segment also suffered from lower realisations, alumina revenues were lower by 35% YoY. On the other hand, the revenues of the copper business went up by 119% YoY on the back of better prices and higher production and sales.

Segmental snapshot…
  Copper Aluminium
(Rs m) 3QFY06 3QFY07 Change 3QFY06 3QFY07 Change
Revenues 13,084 28,622 118.8% 15,634 17,958 14.9%
PBIT (845) 1,595 N.A. 5,421 7,555 39.4%
PBIT margin (%) -6.5% 5.6% - 34.7% 42.1% -

Steady margins: Operating profits of the company spurted 79% YoY on the back of strong LME prices and higher sales of value added products that enjoy better margins. Copper business, which posted a loss of Rs 845 m in 3QFY07 has reported profit of Rs 1595 m during 3QFY07 on account of improved performance of one of the copper smelters and improved Tc/Rc (treatment and refining charges) margins. Sustained operating margin is the result of copper business returning to profitability and strong aluminum prices. Despite hike in finance costs and depreciation costs, the net margins have expanded by 210 basis points, also helped in part by higher other income (increased by 35% YoY).

What to expect?
At the current price of Rs 175, the stock is trading at a price to earnings multiple of 7.4 times its trailing twelve month earnings. We remain positive on the prospects of the company as the outlook for both its businesses - aluminium and copper – remain promising in the medium-term. The improved product mix and increasing contribution of value added products would help curtail the volatility in earnings for the company going forward. The company’s brownfield and greenfield projects are on track and the company is awaiting coalmines allocation by Jharkhand government, which will help to further reduce power costs.

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