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Hindalco: High interest cost mars profits - Views on News from Equitymaster
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Hindalco: High interest cost mars profits
Feb 27, 2015

Hindalco has announced its standalone financial results for the quarter ended Dec 2014. Net sales for the company increased by 18.3% YoY while net profits increased by 7.6% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 18.3% YoY on the back of higher volume and realization in aluminum business partially offset by a fall in realization from the copper business.
  • Operating profits of the company increased by 46.7% YoY contributed by a rise in profitability in both aluminum and copper segments.
  • Despite strong operating performance, net profits grew by just 7.6% YoY as interest expenses rose sharply by 170.9% YoY amidst rise in short term borrowings.
  • The D/E ratio of the company stood at 0.74x.

Standalone financial results
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 72,731 86,030 18.3% 194,159 251,535 29.6%
Expenditure 66,436 76,797 15.6% 177,681 225,847 27.1%
Operating profit (EBDITA) 6,295 9,233 46.7% 16,478 25,687 55.9%
EBDITA margin (%) 8.7% 10.7%   8.5% 10.2%  
Other income 2,042 2,125 4.1% 9,120 6,521 -28.5%
Interest (net) 1,652 4,475 170.9% 4,971 11,708 135.5%
Depreciation 1,998 2,163 8.2% 5,792 5,994 3.5%
Profit before tax 4,687 4,721 0.7% 14,834 14,508 -2.2%
Exceptional items  - - NM - 4,312 NM
Tax 1,347 1,127 -16.3% 3,183 2,539 -20.2%
Profit after tax/(loss)  3,340 3,594 7.6% 11,652 7,656 -34.3%
Net profit margin (%) 4.6% 4.2%   6.0% 3.0%  
No. of shares (m)         2,064.9  
Diluted earnings per share (Rs)         3.7  
Price to earnings ratio (x)*         31  
* trailing twelve month earnings

What has driven performance in 3QFY15?
  • During the quarter ended Dec 2014, Hindalco's topline increased by 18.3% YoY mainly on account of higher volumes as well as better realizations from the aluminum business. Shipments from Novelis were up 18% YoY while realizations in the copper business were muted.

  • The alumina production (including Utkal) was at 593 KT during the quarter compared to 429 KT in 3QFY14. Production from greenfield sites was up by almost 3 times. Utkal production stood at 274 KT while the ramp up at the Mahan smelter too gathered pace with output of 48 KT in 3QFY15. The aluminum production stood at 217 KT in 3QFY15, up 37% YoY.

  • In the copper segment, copper cathode production increased by 7% YoY to 95 KT while DAP production increased by 22% YoY to 82 KT during 3QFY15. The copper segment's net sales increased by 3% YoY to Rs 49.76 bn.

  • Aluminum business' EBIT rose to Rs 3.85 bn from Rs 1.7 bn in 3QFY14. Copper business' EBIT stood at Rs 3.96 bn in 3QFY15, up 32% YoY.
What to expect?
At the current price of Rs 150, the stock trades at 31 times its TTM earnings. During the current quarter, sales growth was driven by higher volumes due to a ramp up in production at Mahan smelter, substantial pick up in greenfield sites and better realizations. While the Aluminum LME price was higher by 11.4% YoY, marginal appreciation in rupee hurt the company.

The Supreme Court in its landmark verdict had declared all the allocations of coal blocks since 1993 illegal for the lack of adequate basis in awarding them. Post this verdict, the government started coal auctions to award blocks to interested companies. And in the recent ongoing auctions Hindalco was able to bag 3 coal blocks. Nonetheless, the price which it paid for one of the blocks in Chattisgarh was highest in the non-regulated sector. This has sparked concerns that the company is bidding aggressively to secure raw material for itself. While ramp up in greenfield capacities may help boost volumes; input cost may rise if the company continues to bid aggressively but is not able to pass on the cost increases amidst slowdown. Taking into considerations these factors we maintain our HOLD view on the stock.

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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