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Indal: Unimpressive performance

Feb 24, 2003

Indian Aluminium Company Ltd., a subsidiary of the A.V.Birla Group, has once again posted unimpressive results in the current fiscal for the quarter ended December 2002. The company has so far delivered a flat performance for the nine months ending December 2002. After a dismal performance in 1QFY03 (due to operations being disrupted by a storm in May 2002), the company saw some reversal in fortunes in 2QFY03. But 3QFY03 has been a disappointment. For 3QFY03, the company registered a fall of 5% in topline and a similar fall in the bottomline. The primary cause was a decline in sales of rolled products due to lack of demand growth. While aluminium business (2/3rd of sales) saw a 5% decline in sales, the chemicals division (1/3rd of sales) notched a YoY growth of 2%.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Sales 3,308 3,150 -4.8% 9,980 9,948 -0.3%
Other Income 105 166 59.0% 232 363 56.3%
Expenditure 2,776 2,679 -3.5% 8,274 8,540 3.2%
Operating Profit (EBDIT) 532 471 -11.5% 1,705 1,408 -17.4%
Operating Profit Margin (%) 16.1% 14.9% 17.1% 14.2%
Interest 79 80 1.3% 265 206 -22.3%
Depreciation 157 179 14.3% 475 515 8.6%
Profit before Tax 400 377 -5.7% 1,198 1,050 -12.4%
Extraordinary items (18) (8) -53.3% (53) (19) -64.5%
Tax 81 82 0.6% 250 189 -24.6%
Profit after Tax/(Loss) 301 288 -4.5% 895 842 -5.9%
Net profit margin (%) 9.1% 8.5% 9.0% 8.5%
No. of Shares 71.1 71.3 71.1 71.3
Earnings per share 16.9 16.1 16.7 15.8
P/E Ratio 7.6

On the exports front, the company managed to increase sales by 12% to Rs 867 m (Rs 772 m) in 3QFY03. If one were to compare the average of monthly average aluminum prices on the London Metal Exchange (LME) for the quarter ending December 2002 with the corresponding period previous year, the prices have increased from US$ 1,318 to US$ 1,352 (a 2.6% rise). This explains the improvement on the export front YoY in the quarter. However, this was partially offset in light of weaker alumina price in the international markets.

While Indalís quarterly performance has been erratic, for 9mFY03, sales have declined marginally. The commissioning of the expanded facility at one of its aluminium manufacturing plant has resulted in a 4% rise in output. This has contributed to the topline growth in volume terms. The sharp spurt in exports (14%) has also added to the growth. When compared with its peers, Indalís performance for 9mFY03 has been lackluster.

Cost breakup
3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Raw Materials 1223 1075 -12% 3768 3431 -9%
Staff Cost 313 440 41% 950 1140 20%
Power and Fuel 682 948 39% 2083 2499 20%
Other Expenditure 674 639 -5% 2062 1882 -9%
Total (% of sales) 87.4% 98.5% 87.8% 90.0%

The companyís performance at the operating level has also been poor in 3QFY03. This is evident from the fall in margins by 120 basis points. Power costs, which account for a quarter of operating expenses, have increased by 39% YoY. Staff costs have also increased sizably, which could be due to the merger of Annapurna Foils Ltd. (AFL) with Indal effective from April 2002. Overall, operating costs as a percentage of sales went up from 87% to 98%, which has had an adverse impact. The decline in margins for 9mFY03 has also got to be viewed in this context.

Interest expenses of the company have fallen by a good 22% in the nine months ending December 2002. This is likely to be due to re-financing of high cost debt. Extra-ordinary items, which pertain to expenses towards voluntary separation scheme, have also fallen by 65%. These two factors helped the company to curtail the bottomline fall.

At Rs 120, the company is trading at a P/E multiple of 7.6x 9mFY03 annualised earnings. Indalís parent company, Hindalco, currently trades at 9x annualised 9mFY03 earnings. Going forward, the companyís expansion of its smelting capacity (at Hirakud, Orissa) to 57,000 MTPA and expansion of captive power to support aluminium production will be reflected in the quarterly results. Moreover, concentration on the exports markets will be higher, as brownfield expansion among major domestic producers will reflect in higher production in the near future. However, one must be cautious as the aluminium prices are ruling strong at US$ 1,400 per tonne. Adverse developments on the US-Iraq war front could send the prices spiraling down, as the growth in the US and European economies may get adversely affected.


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