Hindalco: A brief overview... - Views on News from Equitymaster

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Hindalco: A brief overview...

Apr 9, 2007

Hindalco Industries Limited, the flagship company of the Aditya Birla Group, is structured into two strategic businesses, aluminium and copper (which it acquired from another group company (Indo Gulf) in 2002) and is an industry leader in both. Hindalco's integrated operations and operating efficiency have positioned the company as Asia's largest integrated primary producer of aluminium and among the most cost efficient producers globally. Its copper smelter is the world's largest custom smelter with 500,000 tpa capacity at a single location. In India, Hindalco enjoys a leadership position in speciality alumina, primary aluminium and downstream products. Hindalco's major products in aluminium segment include standard and speciality grade alumina and hydrates, aluminium ingots, billets, wire rods, flat rolled products, extrusions, foil and alloy wheels. The copper plant is backed by captive power plants, oxygen plants, as also by product facilities for fertilisers and precious metals. A captive jetty with cargo handling capacity of over 4 MTPA facilitates easy transport of copper concentrate and other imported raw materials. Financial performance:
In FY06, on the back of strong aluminium prices on the LME, higher utilisation levels coupled with an improved product mix and focus on speciality alumina, revenues from the aluminium business grew by almost 15% on a YoY basis. The company is witnessing increasing contribution from value-added products, which not only have better margins but also low volatility in realisations.

During FY06, the copper business of the company faced disruptions on account of various problems, both external and internal. The heavy rainfalls that resulted in serious dislocation of essential inputs and personnel impacted operations. In spite of lower production, revenues rose by almost 26% YoY on account of high copper prices on LME that led to better prices.

Particulars FY03 FY04 FY05 FY06
Net Sales 49,755 61,909 95,233 113,965
Expenditure 37,614 47,113 72,467 87,914
Operating Profit 12,141 14,796 22,766 26,051
Operating profit margin (%) 24.4% 23.9% 23.9% 22.9%
Other Income 2,329 2,446 2,700 2,439
Depreciation 2,642 3,174 4,633 5,211
Interest 1,201 1,612 1,700 2,252
Profit before tax 10,627 12,456 19,133 21,027
Extraordinary Items (1,633) - (91) 30
Tax 3,173 4,067 5,748 4,502
Net Profit 5,821 8,389 13,294 16,555
Net profit margins (%) 11.7% 13.6% 14.0% 14.5%

While the company's net sales (net operating sales) have grown at a CAGR of 51%, operating profit registered a slightly lower CAGR of 47% during the same period on account of rising operating costs. On account of captive access to power and raw materials, the company has long been enjoying the status of possessing one of the most efficient aluminum smelters in India and globally. Apart from modernisation and effective utilisation of available resources, the company has gained a competitive advantage relative to the global low-cost peers, on account of its increasing focus on captive coal. The copper business was proving to be a drag on the overall performance of the company. A combination of the copper division returning to profitability on account of improved Tc/Rc margins, cost reduction measures, de-risking its copper business by acquiring copper mines and improved aluminum business fundamentals helped the company post higher operating profits. The operating margins though, have dropped marginally.

Traditionally, Hindalco has had a strong balance sheet. It is a cash rich company with cash balance of Rs 9 bn as on FY06. The company recently acquired Atlanta-based Novelis- the largest flat rolled aluminium maker to achieve scale and a global footprint. The deal will not only give an entry into value-added aluminum products but will transform Hindalco into the world's largest player in the downstream business of aluminum products. The combination of Hindalco and Novelis will establish a global integrated aluminum producer with low-cost alumina and aluminum production facilities combined with high-end aluminum rolled product capabilities. The US$ 6 bn imputed value of Novelis includes a cash payment worth US$ 3.6 bn to Novelis' shareholders and debt worth US$ 2.4 bn. As far as the financial implications are concerned, the move is likely to lend stability to Hindalco's earnings as earlier, it was exposed to price volatility that exists at the end user market. However, Hindalco has stretched its balance sheet to acquire Novelis and as a result, cash flows will come under pressure until the debt burden is reduced.

What to expect?
In line with the characteristics of any cyclical industry, strong aluminium prices have triggered plans of expanding aluminium capacities and thus, there could be some demand-supply mismatch going forward. China continues to be the deciding factor by virtue of its production and consumption power. With the Chinese economy not showing any signs of cooling off, the demand for metals continues to outpace supplies. Further though, we remain positive on the prospects of the company as the outlook for both its businesses - aluminium and copper - remain promising in the medium-term but the cyclicality of the aluminium industry is an aspect investors need to be careful about. Going forward, the improved product mix and increasing contribution of value added products would help curtail the volatility in earnings of the company.


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