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Hindalco: Rock solid performance

May 5, 2001

The Aditya Birla flagship company, Hindalco Industries Ltd, has recently reported its annual result for the fiscal year 2001. Unlike technology stocks, the operating and financial performance did not adrenalise the markets. Nevertheless, unexciting as the results maybe, the company has lived up to its genre of 'old economy' with a rock solid performance. The company has reported a turnover growth of 12 percent for fiscal 2001 as compared to 15 percent in the previous year. The growth in sales is commendable considering that the aggregate growth in production has been only 1 percent. The growth in production was constrained as the company already operated above rated capacity. Consequently, any volume led sales growth was fettered. Therefore, the reported growth in turnover has been mainly achieved by improving the product mix focusing towards higher value added items.

(Rs m)FY00FY01Change
Sales 20,312 22,754 12.0%
Other Income 1,387 1,315 -5.2%
Expenditure 10,911 12,225 12.0%
Operating Profit (EBDIT) 9,401 10,529 12.0%
Operating Profit Margin (%)46.3%46.3%
Interest 597 619 3.7%
Depreciation 1,354 1,424 5.2%
Profit before Tax8,8379,80110.9%
Extraordinary items (228) -
Tax 2,485 3,020 21.5%
Profit after Tax/(Loss) 6,124 6,781 10.7%
Net profit margin (%)30.1%29.8%
No. of Shares (eoy) 75 75
Earnings per share82.291.0
P/E Ratio 9.1

This strategy has also enabled the company to maintain its operating margins in a challenging business environment. Energy costs are a key constituent of production expenses and as petroleum (feedstock) prices doubled during fiscal 2001 energy costs also increased. The impact was softened with domestic aluminium prices remaining firm at the higher end of previous years levels. Additionally, the company maintained strict vigil over operating expenses to keep the distinction of being the lowest cost aluminium producer in the world.

Pre-tax profits have also risen by double digits buoyed by lower interest costs. The debt servicing charges have been kept under control by refinancing higher cost foreign exchange debt with lower interest rate borrowings.

To overcome the current production constraints the company has embarked on a brownfield expansion project at its Renukoot facility. As per the blueprint, it aims to augment smelter capacity by 100,000 tonnes per annum (TPA) and alumina refining capacity by 210,000 TPA. This signifies an expansion of almost 50% above its current capacity by end of fiscal 2003. As mentioned earlier, aluminium is a power intensive industry. Consequently, the company has also planned to augment its captive power generating capacity to 796 mega watts (MW) for meeting the increased requirements. An additional 15,000 tonnes of smelting capacity is expected to come onstream in the current year.

In early fiscal 2000, in an all cash deal, Hindalco Industries acquired controlling stake in the largest fabricated aluminium producer, Indian Aluminium (Indal) for Rs 10 billion. The 54.6 percent stake was acquired from the international major Alcan. The benefits from the deal are expected to continue to accrue with rationalization of products and a cohesive marketing effort. The synergy between the two companies was apparent with Indal surplus in alumina and short in aluminium while vice-versa for Hindalco. Consequently, the companies are taking advantage of this situation.

Cognizant of the industry characteristics -- commodities business -- the company has initiated exercises to remain amongst the lowest cost producers in the world. This is essential, as the market forces of demand and supply determine prices. Therefore, control on cost is imperative. The latest initiative, 'Rocket 2K': Profit Improvement Exercise, is focused on boosting the bottomline through higher thru-put, better operating efficiencies, greater cost control and shortening the working capital cycle. Also, the company plans to adopt an integrated IT platform to facilitate achieving the above goal.

Given the ability of the company to perform under adverse conditions the internal variables seems to be well under control. The recent budget and monetary policy, guiding the external environment, are directed towards propelling future economic growth. The key aluminium consumption sectors are electrical, transportation, packaging and construction. The recent budget stressed on overcoming the bottlenecks in the power sector, cut excise duty on passenger vehicles and provided sops for the housing sector. With consumerism to pick up in the country packaging will play its 'p'art in marketing. Consequently, all these sectors are poised for growth, which could keep the demand -supply scenario on favourable terrain.

However, consumption of aluminium has slowed down in the first quarter of calendar year 2001 after registering growth of 6 percent in calendar year 2000. The decline in consumption is largely due to a slowdown in the global economy led by America and Japan. In case these economies falter further the prices of the commodity would weaken adversely impacting the fortunes of the company.

Currently, though a U.S revival is expected in the second half of calendar year 2001. With global inventories still at low levels an economic revival could see prices firming up again similar to fiscal 2000. Hindalco would continue to be a beneficiary from an upturn in the cycle.

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