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Hindalco: High interest cost sinks profits
Feb 11, 2013

Hindalco has announced its standalone financial results for the quarter ended December 2012. Net sales for the company increased by 3.4% YoY while net profits declined by 3.8% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company improved by 3.4% YoY on back of higher volumes.
  • Operating profits of the company declined by 18.4% YoY due to high input costs. Operating margins were down by 2.2% YoY.
  • Net profit declined by 3.8% YoY during the quarter. Net margins declined by 0.5% YoY.
  • For the nine month ended December 2012, net sales remained flat (up 0.6% YoY) and net profits declined by 23.8% YoY.

Standalone financial performance
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 66,470 68,717 3.4% 189,497 190,632 0.6%
Expenditure 59,336 62,897 6.0% 167,097 175,027 4.7%
Operating profit (EBDITA) 7,134 5,821 -18.4% 22,400 15,605 -30.3%
Operating profit margin (%) 10.7% 8.5%   11.8% 8.2%  
Other income 916 3181 247.3% 4553 7519 65.1%
Interest (net) 793 1690 113.0% 2136 2783 30.3%
Depreciation 1,747 1884 7.8% 5242 5316 1.4%
Profit before tax 5,509 5428 -1.5% 19575 15025 -23.2%
Exceptional Item - 0   0 0  
Tax 1,002 1093 9.0% 3603 2853.1 -20.8%
Profit after tax/(loss) 4,507 4335 -3.8% 15972 12172 -23.8%
Net profit margin (%) 6.8% 6.3%   8.4% 6.4%  
No. of shares (m)         1,915  
Diluted earnings per share (Rs)         9.8  
P/E ratio (x)*         11.5  
*trailing twelve month earnings

What has driven performance in 3QFY13?
  • During the quarter ended December 2012, Hindalco's topline improved by 3.4% YoY and 11% QoQ largely due to higher copper volume. Alumina production was down 5% YoY and 1% QoQ at 326,000 tn, primarily due to subdued production at Belgaum refinery on account of lower bauxite availability. Aluminium production was down 5% YoY at 139,000 tn, but up 9% QoQ due to normalisation of operations after witnessing temporary disruptions in 1HFY13. Copper cathode production was down 4% YoY, but up 8% QoQ at 84,000 tn.

  • In terms of segment revenue, the aluminium segment posted a drop of 1% YoY at Rs 22,155 m, but it was up 5% QoQ. Copper segment's revenue was up 5% YoY and 15% QoQ at Rs 46,608 m due to higher volume and realisation. In EBIT terms, the aluminium segment posted a drop of 33% YoY at Rs 2,064 m, but it was up 22% QoQ. Copper segment's EBIT was up 4% YoY and 8% QoQ at Rs 2,252 m.

    Cost break-up
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Raw Materials 43,965 46,570 5.9% 121,209 125,502 3.5%
    % of sales 66.1% 67.8%   64.0% 65.8%  
    Staff costs 3,040 3,082 1.4% 8,456 9,113 7.8%
    % of sales 4.6% 4.5%   4.5% 4.8%  
    Power & fuel 7,385 7,549 2.2% 21,266 23,187 9.0%
    % of sales 11.1% 11.0%   11.2% 12.2%  
    Other Expenditure 4,944 5,695 15.2% 14,119 17,221 22.0%
    % of sales 7.4% 8.3%   7.5% 9.0%  
    Purchase of traded goods 2 -   2,047 4 -99.8%
    % of sales 0.0% 0.0%   1.1% 0.0%  
    Total operating cost 59,336 62,897 6.0% 167,097 175,027 4.7%
    % of sales 89.3% 91.5%   88.2% 91.8%  

  • The company posted 18.4% YoY drop in operating profit at Rs 5,821m but up 13% QoQ because of pressure on its aluminium business due to higher costs. Net profits registered a drop of 3.8% YoY. The interest costs jumped 113% YoY and 507% QoQ to Rs 1.7 bn during the quarter. As per the management, this was because the company started servicing Rs 60 bn bonds at 9.55% interest rate. This is likely to keep the interest costs elevated going forward. Also, the other income of Rs 3.2 bn (up 253% YoY and 140% QoQ) includes Rs 1.44 bn of corporate provision write-back which more than offset the higher interest cost.

  • Greater average borrowings during the quarter resulted in higher interest costs. The capital employed for aluminium business at Rs 298 bn includes Rs 210 bn relating to new investments, Mahan Aluminium, Hirakud Aluminium and Aditya aluminium projects. For its Mahan Aluminium project, the company drew USD $100 m from Export Development Canada.

What to expect?
The company guided that its Mahan Aluminium, Utkal Alumina and Hirakud FRP projects are in the final stages of implementation and will be ready for trial runs shortly. However, the contribution from higher volume is likely to be restricted by elevated depreciation and interest costs for the standalone entity. Thus, we do not expect the bottomline to see any major surprise on either side in the coming quarters. The spending on the greenfield projects rose by Rs 16 bn QoQ to Rs 210 bn. At the end of 3QFY13, the standalone gross debt stands at Rs 240 bn with net debt at Rs 150 bn.

At the current price of Rs 110, the stock trades at a P/BV multiple of 1.6x our estimated FY15 book value per share. We maintain our Buy view on the stock.

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