Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hindalco: Keeps head above water - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • May 3, 2002

    Hindalco: Keeps head above water

    The flagship A.V. Birla group company, Hindalco Industries Ltd. (HIL), has faced another challenging year. The slowdown, which started in FY01 seems to have intensified in FY02, which is reflected in turnover and bottomline growth of the company. Growth in FY01 was largely through better realisations. However, in FY02, with a global and domestic economic downturn, both demand and realisations took a hit, which impacted the business.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Net Sales 5,983 6,477 8.3% 22,754 23,314 2.5%
    Other Income 286 802 180.4% 1,315 2,109 60.4%
    Expenditure 3,378 4,015 18.9% 12,225 13,374 9.4%
    Operating Profit (EBDIT) 2,605 2,462 -5.5% 10,529 9,940 -5.6%
    Operating Profit Margin (%) 43.5% 38.0%   46.3% 42.6%  
    Interest 127 111 -12.6% 619 456 -26.3%
    Depreciation 360 406 12.8% 1,424 1,543 8.4%
    Profit before Tax 2,404 2,747 14.3% 9,801 10,050 2.5%
    Tax 883 825 -6.6% 3,020 3,190 5.6%
    Profit after Tax/(Loss) 1,521 1,922 26.4% 6,781 6,860 1.2%
    Net profit margin (%) 25.4% 29.7%   29.8% 29.4%  
    No. of Shares 74.5 74.5   74.5 74.5  
    Diluted Earnings per share* 81.7 103.3   91.1 92.1  
    P/E Ratio         8.0  

    The slowdown, much of which began in 4QFY01, seems to have taken a toll on the first quarter performance of HIL. The company, ever since, has been improving its YoY quarterly sales performance. Having said that, full year sales have been driven by 4QFY02 performance. As was the case with the subsidiary -- Indal -- turnover growth has been generated by higher volumes, as realisations declined in FY02. Productions figures were higher by 3.8% - 34.9% for saleable products, except extrusions (-12.6%) and alloy wheels (-0.7%). The marginally higher inventories indicate that much of the production did materialise into sales. HIL has come ahead of our full year sales growth expectation of 1%.

    Volume led growth mentioned earlier largely fructified in the last quarter of FY02. Over three years -- FY02 - FY04 -- HIL plans to augment smelting (aluminium) capacity by 100,000 metric tonnes per annum (MTPA). As per schedule, the 9th potline with 33,000 MTPA of capacity was commissioned during FY02. The entire rise in aluminium production of 9,846 MT has materialised from the new potline. Having said that, at the start of FY02, the company anticipated additional output of 15,000 MT, which seems to suggest an estimated delay of 2 months from production target date. The potline seems to have operated for an estimated 4 months, commencing commercial production in December '01, as compared to expectations of October '01.

    Operating above rated capacity in refining and smelting prior to the expansion, the new potline has offered some breathing space to the company. However, there is no indication of additional alumina capacity to support the higher aluminium production. But a sweetening process seems to have facilitated the entire 18,024 MT increase in alumina production, which is commendable considering the high existing operating rates. This performance seems to explain the stretched process parameters of the company. Realisations, and to that extent margins, have been protected by greater presence in downstream, high value products.

    With a drop in margins, operating profits for the concerned periods took a hit, as expenditure grew at a faster clip compared to sales. Operating costs have increased due to higher volume sales, which also indicates that unit cost has not fallen commensurately with realisations, leading to pressure on margins. Peer group companies have reported a similar trend. Prices of caustic soda, a key input for alumina production, doubled during fiscal '02. Increase in coal prices at start of FY02 led to higher energy costs. Also, the company entered into a fresh wage agreement at start of 2002, which impacted 4QFY02 expenses. The agreement is valid upto December '04 and entails an estimated 30% hike in wages.

    That said, high operating rates, efficiency improvement initiatives, downstream presence and better product mix helped ameliorate some of the pressure on margins. In FY02, the company undertook Project Rocket - 2K, a profit improvement exercise, emphasising on higher operating efficiency and cost reduction. The initiative was expected to yield savings of Rs 400 m - 500 m over two years. HIL continues to drive the initiative, but entire savings are now likely to materialise by FY04. In the current fiscal, the company begun implementation of an ERP system likely to be completed over the next 2-3 years with an estimated cost of Rs 240 m. The IT system is likely to streamline business processes, especially supply chain and customer relations, which could yield additional savings by lowering cycle times.

    Interest costs have declined in all quarters of FY02. This could be due to reducing interest rates over the past 12 months. Also, the company has capitalised some of the interest in FY02, which to some extent has added to the depreciation. Investment of surplus funds in FY01 has led to higher other income. Also, with investment in debt funds and declining interest rates, the company yielded capital gains, which were offset against carryforward losses to reduce tax liability. Adjusting for other income, pre-tax profits would drop by 6.4%, which indicates that quality of earnings have weakened. A lower effective tax rate by 520 basis points, which could be due to removal of corporate tax surcharge in FY02, has also helped lift post tax profits.

    The Rs 18 bn brownfield expansion at Renukoot is targeted to be completed by FY04. The exercise will expand capacity by approximately 50%, removing production constraints. Also, with an expected global & domestic economic turnaround, realisations are likely to improve. Financials in FY03 and especially FY04, assuming global economic growth gains momentum, could get a double kicker from higher volumes and better realisations. The company seems well poised to gain from an upturn in business. Also, over a twelve month period commencing February '02, a share repurchase programme through the open market route is being conducted by the company. Shares will be repurchased at a maximum price of Rs 825 with aggregate outlay not exceeding Rs 4.3 bn. Extrapolating from percentage holding of non-promoters, HIL seems to have repurchased at estimated 20,500 shares. The lower equity will lift per share earnings going forward.

    At Rs 740, the scrip is trading on a multiple of 8x FY02 earnings. The higher valuations accorded to the company, compared to its peers, is due to the greater focus on downstream products. Alumina and alumina chemicals contribute an estimated 20% and 25% of Nalco and Indal sales. The entire alumina production is consumed internally at HIL. This does not expose company revenues to volatility in alumina prices, which were down an estimated 50% in FY02. Ability of the company to increase revenue share of downstream, value added products is likely to further insulate earnings from commodity cycles, which could favourably impact valuations.



    Equitymaster requests your view! Post a comment on "Hindalco: Keeps head above water". Click here!


    More Views on News

    Hindalco: Strong Performance at Operating Level (Quarterly Results Update - Detailed)

    Feb 22, 2017

    Hindalco Industries has reported a 14.5% YoY increase in the topline while the bottomline came at Rs 3.2 billion.

    Hindalco Industries: Strong Operational Performance Boosts Profitability (Quarterly Results Update - Detailed)

    Nov 30, 2016

    Hindalco Industries has reported a 1.1% YoY increase in the topline while the bottomline has accelerated by 255.4% YoY.

    Hindalco Industries: Cost Efficiency Boosts Profitability (Quarterly Results Update - Detailed)

    Aug 18, 2016

    Hindalco Industries has reported a 11.4% YoY decline in the topline while the bottomline has accelerated by 379% YoY.

    Hindalco Industries: A Stellar performance (Quarterly Results Update - Detailed)

    Jun 6, 2016

    Hindalco Industries has reported a 7.5% YoY decline in the topline while the bottomline has accelerated by 123.4% YoY.

    Hindalco Industries: Realisations Hurt Topline (Quarterly Results Update - Detailed)

    Feb 17, 2016

    Hindalco Industries has reported a 5.3% decline in topline while the bottomline has declined by 88.7%

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 17, 2017 (Close)


    • Track your investment in HINDALCO with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks


    Detailed Financial Information With Charts