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Hindalco: High input cost damage profits

Feb 10, 2012

Hindalco Industries Limited has announced its financial results for the quarter ended December2011. The company has reported an increase of 11.3% YoY in net sales and a decline of 2.1% YoY in net profits respectively. Here is our analysis of the results:

Performance summary
  • Topline grows by 11.3% YoY during 3QFY12 on back of higher volumes and marginal improvement in realisation.
  • Both operating profit and operating margin declined by 3.4% YoY and 1% YoY respectively. This was due to higher cost of coal.
  • Net profits declined by 2.1%% YoY during the quarter. Net margins declined by 0.9% YoY.
  • Other income grows by 48.6% YoY due to improved treasury yield and enhanced corpus. However this has been offset by higher interest and financing charges on account of high interest rates.
  • For the nine months ended December 2011, net sales and net profits increased by 11.4% YoY and 11.8% YoY.

Standalone financial performance
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Sales 59,746 66,470 11.3% 170128 189497 11.4%
Expenditure 52,345 59,321 13.3% 147419 166981 13.3%
Operating profit (EBDITA) 7,401 7,149 -3.4% 22709 22516 -0.8%
Operating profit margin (%) 12% 11%   13.3% 11.9%  
Other income 606 901 48.6% 2116 4436 109.6%
Depreciation 1,707 1,747 2.4% 5115 5242 2.5%
Interest 516 793 53.8% 1636 2136 30.6%
Profit before tax 5,785 5,509 -4.8% 18075 19575 8.3%
Tax 1,181 1,002 -15.2% 3789 3603 -4.9%
Profit after tax/(loss) 4,603 4,507 -2.1% 14285 15972 11.8%
Net profit margin (%) 7.7% 6.8%   8.4% 8.4%  
No. of shares (m)         1,914  
Diluted earnings per share (Rs)*         13.0  
P/E ratio (x)*         12.3  
*trailing twelve month earnings

What has driven performance in 3QFY12?
  • During the quarter ended December 2011, net sales increased by 11.3% YoY. Higher volumes and slightly improved realisations resulted in 13% improvement in aluminium revenues. Revenues from the copper business increased by 10.45% and stood at Rs 44.18 bn for 3QFY12. This was due to higher LME copper prices and by-product credits.

  • Production of aluminium and alumina registered a growth of 8% and 7% respectively backed by improved operating efficiencies. Quarterly cathode production was back on track after the planned shutdown in the last quarter. Cathode production was up by 9% YoY.

    Cost break-up
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw Materials 38030 43965 15.6% 104882 121209 15.6%
    % of sales 63.7% 66.1%   61.6% 64.0%  
    Staff costs 2467 3040 23.2% 7589 8456 11.4%
    % of sales 4.1% 4.6%   4.5% 4.5%  
    Power & fuel 5508 7385 34.1% 16350 21266 30.1%
    % of sales 9.2% 11.1%   9.6% 11.2%  
    Other Expenditure 4477 4929 10.1% 13645.7 14001.7 2.6%
    % of sales 7.5% 7.4%   8.0% 7.4%  
    Purchase of traded goods 1863 2 -99.9% 4953 2047 -58.7%
    % of sales 3.1% 0.0%   2.9% 1.1%  
    Total operating cost 52345 59321 13.3% 147419 166981 13.3%
    % of sales 87.6% 89.2%   86.7% 88.1%  

  • Operating profits of the company declined by 3.4% YoY. The benefits of higher volumes and realizations were negated by surge in cost. Expenditure on YoY basis increased by 13.3%. Power and fuel cost increased by 34.1% YoY due to non-availability and high cost of coal.

  • Net profits declined by 2.3% YoY as a result of higher interest expense and lower EBITDA. Net profit margins contracted by 0.9% YoY.

  • Hindalco’s US based subsidiary, Novelis which accounts for 60% of the company’s earnings also posted disappointing results for the quarter ended December 2011. 3QFY12 performance of Novelis remained muted with a 9% YoY fall in rolled product shipments. This coupled with fall in realizations, increase in working capital, power & fuel and labour costs pulled down the adjusted EBITDA by 24% YoY. Going ahead, we believe, Novelis will perform steadily given that the can ceiling contracts have seized and it has already renewed contracts with some of its major customers (Coca Cola in North America). Further, the entries in the growth regions such as Asia and Brazil are likely to provide a volume growth for the company in the medium to long term future.

What to expect?
Hindalco has lined up robust capacity expansion plans in the aluminum segment. Going ahead, we believe, the successful completion of projects and start up of the key mines feeding the expanded capacities will be the key to the absolute EBITDA growth of Hindalco. However, the commissioning of Mahan smelter is believed to have been pushed back in FY13. No material development has been done during the quarter. We believe this would continue to be a concern for the company going forward. The company will also issue 150 m preferential warrants to the promoters and raise Rs 20 bn. This money will be used in the various expansion projects. The global macro-economic situation still continues to be challenging. In response to low metal price and high operating cost, some of the major producers have announced production cuts, which are expected to boost metal prices in the coming quarters.

At the current price of Rs 160, the stock trades at a P/BV multiple of 0.9x our standalone estimated FY14 book value per share. We recommend a HOLD on the stock.

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