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Hindalco: Realisations take toll - Views on News from Equitymaster

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Hindalco: Realisations take toll
Jan 31, 2008

Performance summary
  • Net sales decline 3% YoY during the quarter, led by 2% fall in copper revenues.

  • Spiraling costs lead to a 23% YoY drop in operating profits as margins contract by 470 basis points.

  • A benign depreciation charge and near doubling of other income restrict the bottomline decline to 16% YoY during the quarter

  • For the first nine months, the bottomline has shrunk by 3% YoY on the back of a 5% rise in topline.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 46,562 45,317 -2.7% 135,641 141,693 4.5%
Expenditure 36,109 37,311 3.3% 105,990 115,627 9.1%
Operating profit (EBDITA) 10,453 8,006 -23.4% 29,651 26,066 -12.1%
EBDITA margin (%) 22.4% 17.7%   21.9% 18.4%  
Other income 584 1,143 95.7% 2,468 3,487 41.3%
Interest (net) 698 622 -10.9% 1,847 1,816 -1.7%
Depreciation 1,384 1,460 5.5% 4,805 4,334 -9.8%
Profit before tax 8,955 7,067 -21.1% 25,467 23,403 -8.1%
Extraordinary income/(expense)            
Tax 2,516 1,640 -34.8% 7,037 5,519 -21.6%
Profit after tax/(loss) 6,439 5,427 -15.7% 18,430 17,884 -3.0%
Net profit margin (%) 13.8% 12.0%   13.6% 12.6%  
No. of shares (m) 1,042.0 1,226.0   1,042.0 1,226.0  
Diluted earnings per share (Rs)*         20.1  
Price to earnings ratio (x)*         8.5  
(* on trailing twelve months earnings)

What has driven performance in 3QFY08?
Let us have a look as to how the two main segments of the company viz. Aluminium and Copper performed during the quarter:
  • Aluminium: The segment accounted for 38% of the company’s total revenues during the quarter, same as during 3QFY07. Though the division recorded an impressive growth in volumes of 12% YoY, it is the adverse exchange rate and lower LME prices that has led to a 4% decline in revenues and eventually a 23% decline in segmental profits. It should be noted that as opposed to the same quarter last year, rupee has moved up by around 10% against the dollar and domestic aluminium ingot prices are down by around 20%, thus hampering the segment’s performance.

  • Copper: The copper segment too put up a disappointing performance during the quarter as revenues were down 2% YoY. Here too, while volumes were higher, a 41% lower TcRc (Treatment Charges and Refining Charges) and an adverse rupee dollar rate constrained the business. Moreover, since the operating leverage is higher in this business, the impact on profitability was even more severe with the segmental PBIT tumbling by 41% YoY.

    Segmental break-up…
    Aluminium 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Revenues 17,958 17,290 -3.7% 53,020 52,677 -0.6%
    PBIT 7,555 5,789 -23.4% 21,390 18,833 -12.0%
    PBIT margin 42.1% 33.5%   40.3% 35.8%  
    Copper
    Revenues 28,622 28,062 -2.0% 82,664 89,107 7.8%
    PBIT 1,595 940 -41.1% 3,806 3,324 -12.7%
    PBIT margin 5.6% 3.3%   4.6% 3.7%  

  • As far as the overall EBITDA margins of the company are concerned, all the cost heads grew at a faster rate than the topline and hence, pulled down the margins by a significant 470 basis points.

    Cost break-up…
    (Rs m) 3QFY07 3QFY08 Change
    Raw materials 27,708 27,650 -0.2%
    % sales 59.5% 61.0%  
    Staff cost 1,270 1,440 13.4%
    % sales 2.7% 3.2%  
    Power and fuel 4,496 4,918 9.4%
    % sales 9.7% 10.9%  
    Other expenditure 2,635 3,303 25.4%
    % sales 5.7% 7.3%  

  • Decline in bottomline at 16% has been better than the performance at the operating level where profits fell 23% YoY. A benign 6% growth in depreciation charges and the almost doubling of other income were the key factors responsible for the same. Net profit margins fell by 180 basis points.

What to expect?
At the current price of Rs 170, the stock is trading at a multiple of 8.5 times its trailing twelve-month earnings. We are in the process of updating our research report on the company and will soon come out with our forward estimates for the same.

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