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Hindalco: Lower prices hurt profits

Feb 14, 2014 | Updated on Feb 17, 2014

Hindalco has announced its standalone financial results for the quarter ended December 2013. Net sales for the company increased by 5.8% YoY while net profits decreased by 23% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 5.5% YoY on back of lower volumes.
  • Operating profits of the company increased by 8.1% YoY due to lower input costs. Operating margins were up by 0.2% YoY.
  • Net profit declined by 23% YoY due to higher tax outgo and lower other income. Net margins declined by 1.7% YoY.
  • For the nine months ended December 2013, net sales increased by 1.9% YoY and net profits decreased by 4.3% YoY.

Standalone performance summary
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 68,717 72,731 5.8% 190,632 194,159 1.9%
Expenditure 62,897 66,436 5.6% 175,027 177,681 1.5%
Operating profit (EBDITA) 5,821 6,295 8.1% 15,605 16,478 5.6%
Operating profit margin (%) 8.5% 8.7%   8.2% 8.5%  
Other income 3,181 2042 -35.8% 7519 9120 21.3%
Interest (net) 1,690 1652 -2.3% 2783 4971 78.6%
Depreciation 1,884 1998 6.1% 5316 5792 9.0%
Profit before tax 5,428 4687 -13.7% 15025 14834 -1.3%
Exceptional Item - 0   0 0  
Tax 1,093 1347 23.3% 2853.1 3182.6 11.5%
Profit after tax/(loss) 4,335 3340 -23.0% 12172 11652 -4.3%
Net profit margin (%) 6.3% 4.6%   6.4% 6.0%  
No. of shares (m)         1,915  
Diluted earnings per share (Rs)         8.6  
P/E ratio (x)*         11.6  
*trailing twelve month earnings

What has driven performance in 3QFY14?
  • During the quarter ended December 2013, Hindalco's topline increased by 5.8% YoY mainly on account of higher copper volumes. In the aluminium segment, both alumina and aluminium production increased by 4.9% and 13.7% YoY to 342 kt and 158 kt respectively. The aluminium segment's net sales increased by 11.5% YoY. In the copper segment, copper cathode production increased by 6% YoY to 89 kt and the copper segment's net sales increased by 3.3% YoY. The management attributed the strong copper production growth to better feed rate and operating efficiencies. For the aluminium division, the growth in revenue was curtailed by lower product premiums. Product premiums were lower on a QoQ basis due to lower sales of value added products. Alumina production too was strong on a QoQ basis.

  • Aluminium business EBIT was quite lower due to high power costs. Spot premiums reduced on a QoQ basis for the company leading to a 20 bps decrease in EBIT margins. Aluminium business EBIT stood at 6.9%, the lowest for the last five years. This impact on overall operating profit was lowered by a strong performance by the copper division. The company for the second consecutive quarter reported its highest margins over the last three years. Power and Fuel costs as a % of sales increased from 11% in 3QFY13 to 13% due to lower linkage coal.

    Cost summary
    (Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Raw Materials 46,570 48,522 4.2% 125,502 125,301 -0.2%
    % of sales 67.8% 66.7%   65.8% 64.5%  
    Staff costs 3,082 3,324 7.8% 9,113 9,956 9.3%
    % of sales 4.5% 4.6%   4.8% 5.1%  
    Power & fuel 7,549 9,486 25.7% 23,187 26,370 13.7%
    % of sales 11.0% 13.0%   12.2% 13.6%  
    Other Expenditure 5,695 5,104 -10.4% 17,221 16,053 -6.8%
    % of sales 8.3% 7.0%   9.0% 8.3%  
    Purchase of traded goods NA NA   4 0 -92.1%
    % of sales NA NA   NA NA  
    Total operating cost 62,897 66,436 5.6% 175,027 177,681 1.5%
    % of sales 91.5% 91.3%   91.8% 91.5%  

  • Overall, due to lower other expenses (down 10.4% YoY) and better performance from copper segment the company's EBITDA increased by 8.1% YoY. The company's interest costs decreased by 2.3% YoY. However tax expenses increased by 23.3% YoY. As a result net profits declined by 23.3% YoY.

  • Hindalco did not capitalize Utkal refinery and Mahan aluminum smelter. Production under trial run at Mahan was 18,000 tons and 87,000 tons at Utkal Alumina. Aditya Aluminium smelter has started metal tapping. Utkal will be the only value generator among Greenfield projects.
What to expect?
Although Hindalco has expanded its aluminium capacity recently, low aluminium prices, sticky costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth. Without captive coal block, the Mahan smelter is expected to face cost pressures, resulting in lower return ratios over the coming two years. The Mahan coal block got stage II forest clearance. We believe, despite it being a major event, assuming easy go ahead would be wrong. The whole coal block allocation issue is under observation of the Supreme Court and the judgment can be disastrous also. Again, there is high possibility of Gram Sabha meetings in line with what happened in Niyamgiri. So, with these controversies and protests from the local people, we don't think the state government would be in a hurry to sign mining lease for the project. Thus, it will take a longer time even in case the SC gives it a go ahead.

At the current price of Rs 100, the stock trades at a multiple of 11.6 times its TTM P/E on a standalone basis. We maintain our Hold view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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