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Hindalco: Copper distorts numbers - Views on News from Equitymaster
 
 
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  • Apr 30, 2003

    Hindalco: Copper distorts numbers

    Hindalco, the A.V.Birla group company, announced its 4QFY03 and full year (FY03) numbers. The company is the largest producer of primary aluminium in the country and is also one of the lowest cost producers of the base metal in the world. The table below shows the 4QFY03 and the FY03 numbers of the company. However, it must be noted here that the figures for the quarter ended March and for the full year are not comparable to that of the respective corresponding periods of last year, due to the inclusion of Indo Gulf’s Copper division performance with that of Hindalco.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net Sales 6,477 13,215 104.0% 23,314 49,755 113.4%
    Other Income 802 730 -9.0% 2,109 2,329 10.4%
    Expenditure 4,015 10,584 163.6% 13,374 37,614 181.2%
    Operating Profit (EBDIT) 2,462 2,631 6.9% 9,940 12,141 22.1%
    Operating Profit Margin (%) 38.0% 19.9%   42.6% 24.4%  
    Interest 111 377 239.6% 456 1,201 163.4%
    Depreciation 406 715 76.1% 1,543 2,642 71.2%
    Profit before Tax 2,747 2,269 -17.4% 10,050 10,627 5.7%
    Extraordinary items 0 -1,633     -1,633  
    Tax 825 440 -46.7% 3,190 3,173 -0.5%
    Profit after Tax/(Loss) 1,922 196 -89.8% 6,860 5,821 -15.1%
    Net profit margin (%) 29.7% 1.5%   29.4% 11.7%  
    No. of Shares 74.5 92.5   74.5 92.5  
    Diluted Earnings per share       74.2 62.9  
    P/E Ratio         9.8  

    However, from the numbers available, the company’s aluminium division contributed almost 53% of the net sales. To put this in numbers, the aluminium division recorded sales of Rs 7 bn in 4QFY03 as compared to Rs 6.5 bn in the corresponding quarter last year. This implies a growth of 8% YoY in aluminium sales. The improved aluminium performance is commendable in the light of the fact that the aluminium industry has had a lackluster FY03 and the aluminium prices have displayed some weakness. To put things in perspective, average aluminium prices have fallen 3% in the last one year.

    Hindalco’s operational performance in terms of production has shown an improvement. The company’s aluminium metal production showed a rise of 7.5% in 4QFY03 as compared to the corresponding period last year while its production of calcined alumina increased by almost 8% YoY. For the full year also, aluminium metal production increased by 2% while the calcined alumina production was higher by 1%. The full year numbers are a bit subdued due to the fact that the company had suffered production losses in the earlier quarters.

    It is likely that the company’s margins will not be affected much when the numbers are compared on a like-to-like basis as the company’s focus on value added downstream products would have offset, to some extent, for any loss in margins due to weakening prices. The share of the value added products in the total revenues of the company has gone up from 31% in FY02 to 34% in FY03. Venturing into value added downstream products, in a way, seems to have insulated the company from the volatility in aluminium prices.

    As far as the expansion plans of the company goes, it is the final leg of its Rs 18 bn brownfield expansion at Renukoot. The company’s aluminium capacity currently stands at 320,000 tonnes and on completion of the final phase of expansion, capacity will stand at 342,000 tonnes. Moreover, through modification, debottlenecking and marginal improvement in expansion plans, the company further plans to raise the capacity to 360,000 tonnes. On the alumina refinery front, the expanded capacity will stand at 660,000 tonnes (450,000 tonnes originally), which could be further augmented to 700,000 tonnes. On the company’s original expansion agenda is also the hiking of its power generation capacity from 619 MW to 779 MW.

    Going forward, the company plans to make optimal utilization of its capacities and by increasing efficiencies, plans to lower its cost of production. The company has plans to reduce its cash cost of aluminum production by nearly US$ 50 per tonne from the current US$ 850 per tonne. It must be noted here that the world average cost of production rests at US$ 1150 per tonne. This gives Hindalco the distinction of being one of the lowest cost producers in the world.

    At Rs 617, the stock is trading at a P/E multiple of 10x its FY03 earnings (including copper division). Going forward, the long-term prospects of the company look promising. With its expansion plans near completion and the domestic demand likely to grow in the region of 4%-5%, Hindalco seems well placed to take advantage of any improved aluminium industry scenario. Moreover, the company plans to bid for Nalco, which should be divested in the current fiscal. Benefits of synergies with Indal will start to reflect in the quarters ahead. However, the only concern, which remains is the recovery in aluminium prices that hinges on the improvement in world economies. On the domestic front, normal monsoons would also be a key factor deciding the growth of the company in the year ahead.

     

     

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