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Hindalco: Brownfield expansion kicks in - Views on News from Equitymaster

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Hindalco: Brownfield expansion kicks in
Jan 27, 2010

Performance summary
  • Standalone topline grows by 29% YoY during 3QFY10 on account of higher production in both the aluminium and copper segments. Higher realisations from copper also help.
  • EBITDA margin declines to 14% during the quarter from 19% in 3QFY09 primarily as raw material cost increases by 10% as a percentage of sales.
  • Other income declines by 67% during the quarter.
  • Standalone bottomline registers a decline of 22% YoY during 3QFY10 on account of lower operating margins and other income. A nearly unchanged tax outgo does not help matters.


Standalone financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 41,172 53,153 29.1% 144,479 141,319 -2.2%
Expenditure 33,380 45,677 36.8% 117,263 120,173 2.5%
Operating profit (EBDITA) 7,792 7,476 -4.1% 27,216 21,146 -22.3%
EBDITA margin (%) 18.9% 14.1%   18.8% 15.0%  
Other income 1,505 496 -67.1% 5,419 1,822 -66.4%
Interest 932 729 -21.7% 2,548 2,075 -18.6%
Depreciation 1,611 1,676 4.0% 4,771 4,988 4.6%
Profit before tax 6,754 5,566 -17.6% 25,317 15,905 -37.2%
Tax 1,306 1,295 -0.8% 5,702 3,388 -40.6%
Profit after tax/(loss) 5,448 4,271 -21.6% 19,615 12,517 -36.2%
Net profit margin (%) 13.2% 8.0%   13.6% 8.9%  
No. of shares (m)         1,914  
Diluted earnings per share (Rs)*         8  
Price to earnings ratio (x)*         19.5  
*On trailing twelve months basis

What has driven performance in 3QFY10?
  • During 3QFY10, Hindalco Industries achieved a 5% YoY growth in aluminium metal production, a 34% YoY growth in rolled aluminium production and a 22% YoY growth in copper production. The higher production is due to capacity increases through the brownfield expansion. Hindalco also reported better realisations from the copper segment. As a result, the company posted a 29% YoY growth in standalone topline during the quarter.

  • Operating profit margins came under pressure during the quarter primarily due to higher raw material costs as a percentage of sales. Lower byproduct credit in the copper business and higher coal prices did not help matters.

    Cost break-up
    (Rs m) 3QFY09 3QFY10 Change
    Raw materials 22,651 34,625 52.9%
    % sales 55.0% 65.1%  
    Staff cost 2,171 2,200 1.3%
    % sales 5.3% 4.1%  
    Power and fuel 4,875 5,104 4.7%
    % sales 11.8% 9.6%  
    Other expenditure 3,683 3,748 1.8%
    % sales 8.9% 7.1%  
    Total cost 33,380 45,677 36.8%
    % sales 81.1% 85.9%  

  • Hindalco’s other income declined by 67% during 3QFY10 on account of lower treasury funds after repaying the bridge loan taken for the acquisition of Novelis.

  • The company has issued 213 m shares through qualified institutional placement. The total proceeds were Rs 27.9 bn. It has been utilized in issue related expenses of Rs 430 m, Rs 450 m in various ongoing projects while the balance has been invested temporarily in mutual funds. Eventually they will used to part finance the equity in new aluminium projects.

What to expect?
Hindalco currently has brownfield expansion projects in Hirakud, Belgaum and Mouda. Several greenfield projects are also underway such as Utkal Alumina in Rayagada, Orissa; Mahan Aluminium in Bargwan, MP; Aditya Aluminium in Orissa and Jharkhand Aluminium in Sonahatu, Jharkhand.

At current price of Rs 155, the stock is trading at a multiple of 0.9 times our expected FY12 book value per share. While the topline growth has exceeded our estimates, the bottomline has been lower than our estimates. However we believe that it will not significantly affect our medium term price target as we use asset based valuation method to value the company. At this juncture however, prices fully reflect the underlying asset value leaving little room for a bargain for investors.

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