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Indal: Manages to hold fort

May 2, 2002

Indian Aluminium Company Ltd. (Indal), which outperformed sector peers for the first nine months of FY02, is likely to fininsh the fiscal on a similar note. Considering the dent in global & domestic demand and lower realisations for alumina and aluminium, the company has reported respectable topline performance and has managed to hold fort in bottomline growth.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net Sales 3,382 3,704 9.5% 12,772 13,684 7.1%
Other Income 61 121 99.0% 105 353 237.2%
Expenditure 2,790 3,192 14.4% 10,217 11,466 12.2%
Operating Profit (EBDIT) 592 512 -13.4% 2,554 2,217 -13.2%
Operating Profit Margin (%)17.5%13.8%20.0%16.2%
Interest 84 87 3.3% 365 351 -3.6%
Depreciation 156 147 -5.6% 630 622 -1.3%
Profit before Tax 412 399 -3.1%1,6651,598-4.0%
Extraordinary items (55) (19)-65.7% (140) (72)-48.6%
Tax 45 105 133.3% 365 355 -2.7%
Profit after Tax/(Loss) 312 276 -11.8% 1,160 1,171 0.9%
Net profit margin (%)9.2%7.4%9.1%8.6%
No. of Shares 71.1 71.1 71.1 71.1
Diluted Earnings per share 17.6 15.5 16.316.5
P/E Ratio 5.8 5.5

Domestic sales have provided impetus to turnover growth, as compared to exports in FY01. Domestic sales for the year are higher by 12.9%. Whereas exports slipped by 6.8% during the same period. A positive sign is the sharp swing in export performance for 4QFY02, registering a growth of 13.1% YoY. Poor export performance was expected, as the global economy, especially U.S -- a key aluminium consumer -- experienced a dramatic downturn in business activity.

With realisations in domestic and export markets under pressure, higher turnover is likely to have been achieved by higher unit sales, value added downstream products and better product mix. Growth in unit sales was largely acquired from sheets and extrusions division. While all divisions are likely to have reported higher unit volumes, Indal faces capacity constraints in alumina and aluminium with output increasing by only 2% and 1% respectively. Having said that, the company has been dynamic in altering the product mix to protect realisations by focusing on high value (quality) products. Greater presence in the downstream business is likely to have driven better financial performance as compared to its peers.

Presence in the downstream segment, dynamic product mix and improved efficiencies has assuaged some of the pressure on operating margins. The lower OPM has taken a toll on the operating performance of the company. In FY02, margins took a double hit, as alumina and aluminium prices declined by an estimated 50% and 10%, while caustic soda prices -- a key ingredient -- nearly doubled. Much of the damage to realisations and margins has been inflicted in 2HFY02, which seems to highlight the impact of 9/11. Although YoY power costs have remained flat, per unit cost of power has increased, which has eaten into efficiency gains. Power cost at Alupuram smelter increased by an estimated Rs 11 m per month since August '01.

Interest expense for the year has been kept under control, which could have resulted from declining interest rates over the past twelve months. The sharp spurt in other income for 3QFY02 has helped push full year numbers considerably higher. Higher cash flows in the previous fiscal is likely to have resulted in higher investment income for FY02. Adjusting for other income, pre-tax profits would be lower by 20%, which indicates that quality of earnings has taken a sizable hit. Effective tax rate -- not including deferred tax -- has declined by 6.2 percentage points.

Going forward, Indal is addressing smelting capacity constraints by nearly doubling capacity at Hirakud, Orissa to 57,000 metric tonnes per annum (MTPA). This is largely through the transfer of pots from the closed Belgaum, Karnataka unit. Commercial production from enhanced capacity is likely to start by end of FY03. Capitive power at Hirakud is also being expanded to support the higher aluminium production. The Appellate Authority for Industrial & Financial Reconstruction (AAIFR) has approved the merger of Annapurna Foils Ltd. (AFL) with Indal effective from April 1 2002. The merger will result in an additional 4,000 MTPA of foil capacity. With an expected global & domestic economic turnaround, performance if FY03 is likely to be driven by improved realisations, better sheet and foil volumes and possibly lower raw material costs. India is excess in Aluminium, considering capacity expansion, thrust is likely to be laid on export markets.

At Rs 90, the scrip trades on a multiple of 5.5x FY02 earnings. Despite the challenges, Indal has convincingly managed to hold fort, especially compared to the peers. The company attracts a lower valuation compared to group peer, Hindalco Industries Ltd. (HIL), which could be due to alumina hydrate (commodity) constituting approximately a quarter of sales. Volatility in commodity prices adversely affects operating margins. The higher smelting capacity and greater focus on downstream products could favourably alter the revenue mix.

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