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Hindalco: Write back saves the day - Views on News from Equitymaster
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Hindalco: Write back saves the day
May 2, 2008

Performance summary
  • Topline growth for the full year stands at 5% YoY.

  • Adverse price movements and currency fluctuations dent operating margins as they fall by 420 basis points (4.2%) during FY08.

  • Net profit grows 12% YoY for the full year but mainly due to a tax write back to the tune of Rs 5.4 bn. Excluding the same, bottomline for the full year suffers a decline of 10% YoY.

  • Similarly, net profits for the fourth quarter show a growth of 49% YoY due to the write back, excluding the same, they fall by 26% YoY on the back of a 6% YoY growth in topline.

Standalone results
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 47,489 50,102 5.5% 183,130 192,010 4.8%
Expenditure 36,990 42,135 13.9% 142,980 157,999 10.5%
Operating profit (EBDITA) 10,499 7,967 -24.1% 40,150 34,011 -15.3%
EBDITA margin (%) 22.1% 15.9%   21.9% 17.7%  
Other income 1,233 1,442 17.0% 3,701 4,929 33.2%
Interest (net) 577 988 71.2% 2,424 2,806 15.8%
Depreciation 1,576 1,516 -3.8% 6,381 5,878 -7.9%
Profit before tax 9,579 6,905 -27.9% 35,046 30,256 -13.7%
Extraordinary income/(expense)            
Tax 2,366 (3,865) -263.4% 9,403 1,647 -82.5%
Profit after tax/(loss) 7,213 10,770 49.3% 25,643 28,609 11.6%
Net profit margin (%) 15.2% 21.5%   14.0% 14.9%  
No. of shares (m) 1,043.0 1,226.0   1,043.0 1,226.0  
Diluted earnings per share (Rs)*       24.6 23.3  
Price to earnings ratio (x)*         8.0  
(* on trailing twelve months earnings)

What has driven performance in FY08?

Let us have a look as to how the two main segments of the company viz. Aluminium and Copper performed during the fiscal:

Aluminium: The segment accounted for 37% of the company’s total revenues during FY08 as compared to 40% in the previous fiscal. Segmental revenues were lower by 3% as compared to FY07. Although sales in volume terms were higher, realisations took a hit. Lower realisations could be attributed to the lower LME prices and since these are dollar denominated, appreciation of rupee against the dollar further increased the woes of the company. It also had to contend with falling import duties and all these factors put together led to lower revenues vis-ŕ-vis FY07. While the revenues of the company are dollar denominated, costs are not and as a consequence, PBIT of the segment was lower by 17% YoY, with margins falling by 600 basis points (6%). Besides rupee appreciation, domestic inflation, which manifested itself in higher raw material and staff costs, also hurt the margins of the segment.

Copper: While the copper segment managed to grow its revenues by 10% YoY for the full year, PBIT was lower by 3% YoY. Unlike the aluminium segment, both the raw material costs and the realisations are dollar denominated and hence, impact of rupee appreciation was marginal if any. However, due to tightness in the copper concentrate market, margins were squeezed and hence, the PBIT margins suffered a fall of 50 basis points for the full year. The physical performance of the segment continued to be impressive with production of copper cathodes and CC rods witnessing a rise of 12% YoY and 28% YoY respectively for the full year.

Segmental break-up…
Aluminium 4QFY07 4QFY08 Change FY07 FY08 Change
Revenues 20,424 18,557 -9.1% 73,444 71,449 -2.7%
PBIT 7,902 5,448 -31.1% 29,292 24,231 -17.3%
PBIT margin 38.7% 29.4%   39.9% 33.9%  
             
Copper            
Revenues 27,112 31,548 16.4% 109,776 120,655 9.9%
PBIT 1,365 1,710 25.3% 5,171 5,034 -2.6%
PBIT margin 5.0% 5.4%   4.7% 4.2%  

As far as the overall EBITDA margins of the company are concerned, all the cost heads except for power and fuel costs grew at a faster rate than the topline and hence, pulled down the margins by a significant 420 basis points.

Cost break-up…
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Raw materials 27,035 31,401 16.1% 106,694 119,147 11.7%
% sales 56.9% 62.7%   58.3% 62.1%  
Staff cost 1,465 1,841 25.7% 5,196 6,212 19.6%
% sales 3.1% 3.7%   2.8% 3.2%  
Power and fuel 4,297 5,370 25.0% 18,486 19,108 3.4%
% sales 9.0% 10.7%   10.1% 10.0%  
Other expenditure 4,193 3,523 -16.0% 12,604 13,532 7.4%
% sales 8.8% 7.0%   6.9% 7.0%  

As mentioned before, if one were to exclude the tax write back of Rs 5.4 bn, net profits for the full year fall by 10% YoY, which is still better than the performance at the operating level. The 33% rise in other income is the key factor responsible for restricting the bottomline decline to 10% YoY excluding the write back. The lower effective tax rate of 5% for the full year is due to the write back of provision for tax resulting from change in estimation of tax liability on progress in tax assessments.

What to expect?
At the current price of Rs 186, the stock is trading at a multiple of 1.2 times our estimated FY10 book value per share, 6% higher than the levels at which we had recently recommended the stock. The company’s net profits have come in 13% higher than our estimates, if one were to exclude the impact of tax write backs. Although, we would shortly revise our numbers, we don’t believe that they are going to be materially different so as to change our view with respect to the medium term outlook. Furthermore, the company’s expansion plans are going as per schedule, which too is a heartening sign.

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