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Aluminium: 9mFY03 in perspective - Views on News from Equitymaster
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  • Feb 17, 2003

    Aluminium: 9mFY03 in perspective

    The December quarter saw a mixed performance by India Inc. Some companies (like from the steel sector) managed to outperform expectations whereas some (technology companies) were not so successful. Let us see how the two aluminium majors – Hindalco and Nalco fared in FY03 so far.

    Consider the two companies’ consolidated nine months numbers. Keep in mind that these two account for over 2/3rd of the domestic aluminium production.

    (Rs m) 9mFY02 9mFY03 Change
    Net Sales 32,594 35,173 7.9%
    Other Income 2,348 2,676 14.0%
    Expenditure 18,270 22,335 22.2%
    Operating Profit (EBDIT) 14,324 12,838 -10.4%
    Operating Profit Margin (%) 43.9% 36.5%  
    Interest 1,157 1,183 2.2%
    Depreciation 3,464 3,933 13.5%
    Profit before Tax 12,050 10,398 -13.7%
    Extra-ordinary Items (1,225) - -
    Tax 3,185 3,280 3.0%
    Profit after Tax/(Loss) 7,641 7,118 -6.8%
    Net profit margin (%) 23.4% 20.2%  
    No. of Shares (m) 718.8 718.0  
    Diluted Earnings per share (Rs)* 14.2 13.2  
    P/E Ratio (x)   10.8  

    Together, these two clocked a topline growth of 8% YoY during April-December 2002. While Nalco’s revenues grew at an impressive rate of 17%, Hindalco’s performance for the first nine months was muted. As is evident from the table below, Hindalco saw a marginal dip in topline. What is the reason for the contrasting trend? Hindalco’s dismal performance in the third quarter (which affected the nine month numbers of the company) was primarily due to the fact that the company had to face a power disruption problem in the month of September. This resulted in a production loss of about 10% in volume terms in 3QFY03 (from 66,900 MT to 60,500 MT). On the other hand, Nalco’s sharp growth in revenues has come from additional capacity expansion. Nalco is expected to add 102,000 MT of aluminium capacity in FY03.

      Nalco Hindalco
    (Rs m) 9mFY02 9mFY03 Change 9mFY02 9mFY03 Change
    Net Sales 15,757 18,401 16.8% 16,837 16,772 -0.4%
    Other Income 1,041 1,407 35.2% 1,307 1,269 -2.9%
    Expenditure 8,911 11,214 25.8% 9,359 11,121 18.8%
    Operating Profit (EBDIT) 6,846 7,187 5.0% 7,478 5,651 -24.4%
    Operating Profit Margin (%) 43.4% 39.1%   44.4% 33.7%  
    Interest 812 916 12.8% 345 267 -22.6%
    Depreciation 2,326 2,654 14.1% 1,138 1,279 12.4%
    Profit before Tax 4,748 5,024 5.8% 7,302 5,374 -26.4%
    Extra-ordinary Items (1,225) - - - - -
    Tax 820 1,570 91.6% 2,365 1,710 -27.7%
    Profit after Tax/(Loss) 2,704 3,454 27.7% 4,937 3,664 -25.8%
    Net profit margin (%) 17.2% 18.8%   29.3% 21.8%  
    No. of Shares (m) 644.3 644.3   74.5 73.7  
    Diluted Earnings per share (Rs)* 5.6 7.1   89.3 66.3  
    P/E Ratio (x)   12.7     8.9  

    However, at the consolidated operating level, margins have taken a pounding. Apart from weakness in aluminium prices, rise in raw material and manufacturing costs has affected operating margins. If one were to compare the average of monthly average aluminum prices on the LME for the nine-months ending December 2002 with the corresponding period previous year, it can be seen that the prices have dropped from US$ 1,400 to US$ 1,340 (over 4% fall). Nalco is comparatively insulated from price fluctuations, being a major producer of alumina (upstream segment).

    On the costs front, on a consolidated revenue basis, raw material costs as a percentage of sales have increased by 60 basis points to 18.7%. Hindalco seems to be the worst affected as far as manufacturing expenses are concerned (the possible effect of the disruption). As mentioned above, the company faced power disruption problem in the month of September 2002, which has escalated operating expenses. Both these factors have had an impact on operating profits.

    Cost break-up
      Nalco Hindalco Consolidated
    (Rs m) 9mFY02 9mFY03 9mFY02 9mFY03 9mFY02 9mFY03
    Raw Materials 2,381 2,661 3,510 3,926 5,891 6,587
    % of sales 15.1% 14.5% 20.8% 23.4% 18.1% 18.7%
    Mfg. Expenses 4,553 5,698 3,931 5,164 8,484 10,862
    % of sales 28.9% 31.0% 23.3% 30.8% 26.0% 30.9%
    Staff Costs 2,875 1,844 1,199 1,437 4,074 3,281
    % of sales 18.2% 10.0% 7.1% 8.6% 12.5% 9.3%

    At Rs 91, Nalco is trading at P/E multiple of 12.7x annualised nine months earnings compared to Hindalco’s 8.9x 9mFY03 earnings. Based on nine months numbers, the industry P/E works out to 10.8 times earnings. From a valuation perspective, Nalco’s valuations are on the higher end of the spectrum primarily due to the disinvestment story. However, seeing the government’s track record, investors must remain cautious of any adverse developments on the divestment front. Though the outlook on aluminium remains bullish in the long term, adverse developments on the US-Iraq war front could send the prices spiraling down, given the heavy reliance on the US economy (US accounts for almost 1/3rd of global aluminium consumption). Hindalco, in its outlook in 3QFY03, has stated that the outlook is cautiously optimistic. Wait and watch.



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