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Hindalco: Outages cause lower volume sales - Views on News from Equitymaster

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Hindalco: Outages cause lower volume sales
Feb 17, 2011

Hindalco recently announced its standalone 3QFY11 results. The company has reported a 12% YoY and 8% YoY growth in net sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Standalone topline grows by 12% YoY during 3QFY11 driven by better realisations.
  • EBITDA margin contracts to 11.5% during 3QFY11 from 13.6% in 3QFY10.
  • Other income grows by 49% and 35% YoY in 3QFY11 and 9mFY11 respectively.
  • Higher other income, lower interest charges and lower effective tax cause the standalone bottomline to grow by about 8% YoY during 3QFY11.

Financial snapshot (Consolidated)
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 52,861 59,179 12.0% 140,496 168,661 20.0%
Expenditure 45,677 52,345 14.6% 120,173 147,419 22.7%
Operating profit (EBITDA) 7,184 6,834 -4.9% 20,322 21,243 4.5%
EBITDA margin 13.6% 11.5%   14.5% 12.6%  
Other income 788 1174 49.0% 2,645 3,583 35.5%
Interest 729 516 -29.3% 2,075 1,636 -21.2%
Depreciation 1676 1707 1.8% 4,988 5,115 2.5%
Profit before tax/(loss) 5,566 5,785 3.9% 15,905 18,075 13.6%
Tax 1295 1181 -8.8% 3,388 3,789 11.9%
Effective tax rate 23% 20%   21% 21%  
Profit after tax/(loss) 4,271 4,603 7.8% 12,517 14,286 14.1%
Net profit margin 8.1% 7.8%   8.9% 8.5%  
No of shares (m)         1914.3  
Diluted EPS (Rs)*         10.9  
P/E (times)*         19.4  
*trailing twelve month earnings

What has driven performance in 3QFY11?
  • During 3QFY11 and 9mFY11, Hindalco's topline registered a rise of 12% YoY and 20% YoY respectively. The growth was mainly driven by a better geographical mix and improved realisations. Higher aluminum LME (London Metal Exchange) and better by-product realisations in the copper business aided the company's sales.

  • However, metal volumes were lower during the quarter. Power outage at the Hirakud smelter and cooling tower outage at the Dahej smelter affected production.

  • The operating margins contracted from 13.6% in 3QFY10 to 11.5% in 3QFY11 due to cost escalations and falling copper treatment charges and refining charges (TC/RC).

  • Other income grew by a robust 49% YoY during the current quarter. Interest charges were lower by 29.3% YoY as a result of lower average interest rate. The effective tax was also lower by 3% YoY during the quarter. As the result, the bottomline registered a rise of 7.8% YoY. Net profit margins dropped marginally from 8.1% in 3QFY10 to 7.8% in 3QFY11. For 9mFY11, the net profits grew by 14.1% YoY.

    Cost break-up
    (Rs m) 3QFY10 3QFY11 Change
    Raw material 34,625 38,030 9.8%
    % sales 65.5% 64.3%  
    Staff cost 2200 2514 14.3%
    % sales 4.2% 4.2%  
    Power and fuel 5104 5508 7.9%
    % sales 9.7% 9.3%  
    Other expenditure 3748 4430 18.2%
    % sales 7.1% 7.5%  
    Purchase of traded goods -   1,863  
    % sales 0.0% 3.1%  
    Total operating cost 45,677 52,345 14.6%
    % sales 86.4% 88.5%  

What to expect?
International aluminium and copper prices have hardened substantially on account of the continued recovery in demand and strong interest by financial investors. The upward trends in the commodity prices and also demand in the key markets in which Hindalco operates augur well for it. The company has brownfield expansion projects in Hirakud and Belgaum. Several greenfield projects are also underway which offer sufficient visibility for the company's topline growth. However, higher input costs, especially the cost of coal, remain a challenge going forward.

At the current price of Rs 212, the stock trades at a P/BV multiple of 1.3x its expected FY13 book value per share (RPro subscribers, click here). We will update our numbers shortly.

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