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Aluminum: FY03 in recap…

Apr 2, 2003

The financial year has come to an end. In this period, the global economies have shown nothing more than a sluggish growth, and commodity prices tend to reflect the situation of the economies. Keeping this in mind, let us see how the aluminum sector has performed during the year, amidst all the gloom and uncertain times for major economies of the world. To begin with, if one looks at the aluminum prices since the beginning of this financial year, it shows a trend unlike one other commodity, steel. On the one hand, where steel prices have been on a continuous rise, the aluminum price trends show a different picture. The aluminium prices show a declining trend in the first half of the current financial year but since then, the prices have firmed up. Aluminium prices fell from around US$ 1,380 per tonne levels in April to US$ 1,280 per tonne in September. However, since then the prices recovered to touch a high of US$ 1,460 per tonne in February, only to retrace back to the current levels of US$ 1,340 per tonne.

It must be noted here that price of aluminum in the international markets is a factor of the inventory built up. The prices show a reverse trend as compared to the inventory levels. During 1HFY03, when aluminum prices fell by 7%, the inventory levels in international markets had increased by around 22%. Similarly, since then, inventory levels decreased by about 5% in February and hence a 14% rise in prices. In March, the inventory levels have increased again.

On the domestic front, since the prices are influenced by the ruling international prices, the share price of aluminum stocks tends to more or less mirror a similar trend. That said, let us see the scenario on the domestic front. Domestic aluminium production increased by 6.5% during the first nine months of FY03 as compared to 3.9% fall registered in the same period of the previous year. In December 2002, the production saw a healthy rise of 9.6%, after three continuous months of fall in aluminium output. This probably is a key reason for the slight weakness witnessed in prices recently.

Now, let us recap the performance of the two domestic aluminium leaders, Hindalco and Nalco. These two major players account for over 70% of the total domestic aluminium production. Beginning with Hindalco, the flagship company of the A.V.Birla group and the largest aluminium producer in the country managed to maintain its topline in the 9mFY03 but was unimpressive at the bottomline. The company’s topline showed a fall of only 0.4% but its bottomline fell by 26%. Fall in profits was mainly due to a severe hit on the operating margins of the company (fall of nearly 1,070 basis points to 34%).

The marginal fall in sales was due to two factors. One, the production of the company was lower in the months of September (due to a major power disruption) and part October, while the other reason could be that the aluminium prices were on a decline in the first two quarters of the year. On the operating front, the prime culprits affecting the margins were manufacturing expenses, staff costs and raw material expenses, which increased by 31%, 20% and 12% respectively. Increase in staff costs was mainly due to the fresh wage agreement, which is valid till 2004, whereas the rise in manufacturing expenses was the effect of ramp up and normalization of operations. The unimpressive performance of the company has led to 31% erosion in market capitalization of the company on the bourses in the last 12 months.

Nalco, however, managed to perform better in 9mFY03. The company is a major player in the upstream business. Hence, shifts in aluminium prices are likely to reflect on the company’s financials. Probably, this could be one of the reasons why the stock has fallen 18% in the last one month in line with a 6% fall in international aluminium prices. In the nine months ending December 2002, the company’s topline grew by 17% while the bottomline registered an increase of 28%. The operating margins improved by 340 basis to 39% primarily due to a lower than proportionate growth in expenditure.

The stock has lost 15% in the last one year. It can be seen from the price chart above that the stock has witnessed considerable volatility in FY03. This is because of the divestment story revolving around the stock. The company was due for disinvestment in FY03, but the company fell prey to the political bureaucracy quite a few times, wherein the process of divestment was stalled and revived a number of times. However, going forward, the stock must be viewed with caution in light of the government’s track record at completing tasks.

Consolidated* performance snapshot
(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)   9.0  
*(annualised)      
* Hindalco and Nalco

Moreover, Budget 2003-04 did not announce any specific measures for the aluminum sector. However, the increased thrust on infrastructure spending will benefit the industry in the long run. Spending on infrastructure sectors and the announcement that mega power status would now be given to all power projects is a positive for the aluminium industry. The power sector accounts for over 1/3rd. of the domestic aluminum consumption. Apart from power, transportation, construction and consumer durables are also the key aluminium-consuming industries.

In the near-term, power and transportation will be the key drivers for the growth of the aluminum sector. With the current power reforms focused on transmission and distribution (T&D) and the possibilities of higher investments in the power sector (once the Electricity Bill is passed), this would contribute to increasing aluminium consumption in the country. Moreover, improvement in infrastructure results in increased trade thus directly benefiting the transportation sector. Thus, considering the facts that the per capita consumption of aluminum in India is very low and India is an emerging market, the longer-term demand outlook remains positive.


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