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Hindalco: Robust year comes to an end

May 2, 2005

Performance summary
Domestic metals major, Hindalco, declared robust 4QFY05 results on Saturday. Led by a respectable 8% YoY growth in topline during the quarter and a sharp improvement in operating margins (up 430 basis points) helped the company register a 66% growth in its bottomline. Further, the company ended FY05 on a buoyant note registering a YoY growth of 25% and 36% at the topline and bottomline levels respectively. The margins also improved by 100 basis points on the full year basis. It must be noted these numbers are on a like-to-like basis i.e. Indal's numbers included.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net Sales 23,309 25,157 7.9% 76,510 95,233 24.5%
Expenditure 18,478 18,872 2.1% 58,963 72,467 22.9%
Operating Profit (EBDITA) 4,831 6,285 30.1% 17,547 22,766 29.7%
EBITDA margin (%) 20.7% 25.0%   22.9% 23.9%  
Other income 700 750 7.1% 2,615 2,700 3.3%
Interest 575 380 -33.9% 1,954 1,700 -13.0%
Depreciation 1,055 1,396 32.3% 3,890 4,633 19.1%
Profit before tax 3,901 5,259 34.8% 14,318 19,133 33.6%
Tax 1,196 1,598 33.6% 4,582 6,464 41.1%
Profit after Tax/(Loss) before extraordinary items 2,705 3,661 35.3% 9,736 12,669 30.1%
Extraordinary items (m) - (824)   - (625)  
Profit after Tax/(Loss) after extraordinary items 2,705 4,485 65.8% 9,736 13,294 36.5%
Net profit margin (%) 11.6% 17.8%   12.7% 14.0%  
No. of Shares (m) 92.5 92.8   92.5 92.8  
Diluted earnings per share* 117.0 193.3   105.3 143.3  
Price to earnings ratio (x)   6.2     8.4  
(* annualised)            

The non-ferrous metals powerhouse
Hindalco, an AV Birla Group company, is India's largest aluminium producer and has the distinction of being one of the lowest cost producers of the metal in the world. It is an integrated player, having captive bauxite mines, power units and high value-added output comprising semi-fabricated aluminium products. The aluminium business of the company contributes to about 55% of the company's revenues but its share in operating profits hovers in the range of 75%-80%. The company also has copper as its business segment(acquired from Indo Gulf), which contributes to the balance of the revenues and profits.

What has driven performance in 4QFY05?
Respectable topline:  The company ended the March quarter on a firm note registering an 8% YoY growth in topline. Better realisations aided by higher sale of value added products helped the company's aluminium business. Prevailing strong aluminium prices (up over 12% in 4QFY05 as compared to the same period last year) and a greater proportion of the company's sales now being contributed by value added products, led to the company's aluminium business witnessing improved margins. During the quarter, the copper business of the company has shown some improvement seemingly on account of improving treatment and refining charges (TcRc). Nonetheless, for the full year, this business segment remained a drag on the company's financials.

Margins improve:  Led particularly by the improvement in aluminum margins during the quarter, the overall margins for the company improved by a good 430 basis points. While the company has not provided the details of its various expenditure heads (of the merged entity), control over the same has led to operating margin expansion.

Write-back effect:  The quarter ending March 2005 saw Hindalco's bottomline surge by a hefty 66% YoY. Apart from the trickle down effect of the company's operational performance, the write back by the company of the provisions for the deferred tax liability of earlier years, provided the fillip to the bottomline. Nonetheless, even without this, the bottomline growth would have had been a good 35% YoY.

What to expect?
At Rs 1,200, the stock is trading at a price to earnings multiple of 8.4 times its FY05 consolidated earnings. (Kindly note that we shall soon incorporate Indal's numbers in our model) Meanwhile, 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. Increasing contribution from the sale of value added products would help curtail the volatility in earnings for the company going forward. Expected growth in power, transport, construction and packaging sectors bode well for the company. Moreover, with increased metal production capacities in both the segments, the company is well placed to continue to capitalize on the economic and industrial upturn. It must be noted that while the copper expansion has been completed, which would soon begin commercial production, the company has embarked upon the expansion of its alumina and aluminium capacities.

However, going forward, hitches in global recovery with major economies like the US, Europe and Japan facing threat of slowdown, could pose some danger for the sector. Moreover, with mixed signals emanating from China, which controls about 1/4th of the worlds metal capacities and consumption, a close watch needs to be kept on this. However, we remain positive on the company in the medium-term considering that the capacity expansions and acquisitions will be reflected in the quarters to come.

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