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Hindalco: High costs, lower prices bite profits - Views on News from Equitymaster

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Hindalco: High costs, lower prices bite profits
May 9, 2012

Hindalco Industries Limited has announced its financial results for the quarter ended March 2012. The company has reported an increase of 11.7% YoY in net sales and a decline of 9.7% YoY in net profits respectively. Here is our analysis of the results:

Performance Summary
  • Topline grows by 11.7% YoY during 4QFY12 on back of higher volumes, despite lower LME aluminium prices.
  • Both operating profit and operating margin declined by 3.7% YoY and 2% YoY respectively. This was due to higher cost of coal.
  • Net profits declined by 9.7% YoY during the quarter. Net margins declined by 1.9% YoY.
  • Other income grows by 31.9% YoY. This was due to the dividend income received from its subsidiary, Dahej Harbour.
  • For the full year ended March 2012, net sales and net profits increased by 11.5% YoY and 4.7% YoY.


Standalone financial performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 68,464 76,471 11.7% 238592 265968 11.5%
Expenditure 59,485 67,823 14.0% 207045 234920 13.5%
Operating profit (EBDITA) 8,979 8,648 -3.7% 31547 31048 -1.6%
Operating profit margin (%) 13% 11%   13.2% 11.7%  
Other income 1,217 1,605 31.9% 3475 6158 77.2%
Depreciation 1,760 1,658 -5.8% 6875 6900 0.4%
Interest 564 801 42.0% 2200 2936 33.5%
Profit before tax 7,873 7,794 -1.0% 25947 27370 5.5%
Tax 789 1,395 76.8% 4578 4998 9.2%
Profit after tax/(loss) 7,084 6,400 -9.7% 21369 22372 4.7%
Net profit margin (%) 10.3% 8.4%   9.0% 8.4%  
No. of shares (m)         1,914  
Diluted earnings per share (Rs)*         12.2  
P/E ratio (x)*         9.7  
*trailing twelve month earnings

What has driven performance in 4QFY12?
  • During the quarter ended March 2012, net sales increased by 11.7% YoY. This was due to higher volumes, despite lower aluminium LME prices. Revenues from aluminium and copper business increased by 13% YoY and 11% YoY respectively. Increase in aluminium revenues was on back of higher sales of value added products. Increase in copper revenues was because of higher copper production and better copper TCRCs.

  • Production of aluminium increased by 4% in 4QFY12 while production of alumina remained flat on YoY basis. However downstream metals sales grew by 12% YoY to 64,000 tonnes.

  • The copper segment of the business performed quite well. Production volume of copper cathode and CC rods rose by 11% and 21% on YoY basis. Sales of copper cathode and CC rods stood at 93,000 and 39,600 tonnes respectively.

    Cost break-up
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw Materials 46481 53148 14.3% 151363 174358 15.2%
    % of sales 67.9% 69.5%   63.4% 65.6%  
    Staff costs 2815 2678 -4.9% 10404 11134 7.0%
    % of sales 4.1% 3.5%   4.4% 4.2%  
    Power & fuel 5865 7440 26.9% 22215 28707 29.2%
    % of sales 8.6% 9.7%   9.3% 10.8%  
    Other Expenditure 4054 4544 12.1% 17841.6 18662.5 4.6%
    % of sales 5.9% 5.9%   7.5% 7.0%  
    Purchase of traded goods 269 12 -95.4% 5222 2060 -60.6%
    % of sales 0.4% 0.0%   2.2% 0.8%  
    Total operating cost 59485 67823 14.0% 207045 234920 13.5%
    % of sales 86.9% 88.7%   86.8% 88.3%  

  • Operating profits of the company declined by 3.4% YoY. The benefits of higher volumes were negated by surge in cost. Expenditure on YoY basis increased by 14%. Power and fuel cost increased by 26.9% YoY due to non-availability and high cost of coal. The prices of coal increased by 20% YoY.

  • Net profits declined by 9.7% YoY as a result of higher interest expense and lower EBITDA. Net profit margins contracted by 1.9% YoY.

  • During the quarter, the company received Rs 700 m as return of capital from its wholly owned subsidiary A V Minerals (Netherlands) B V, which was adjusted in the balance sheet.

  • In April 2012, Hindalco raised Rs 30 bn by issuing 10 year secured redeemable nonconvertible debentures (coupon of 9.55%). In March 2012, the company allotted 150 m warrants to promoters (7% dilution) on preferential basis at Rs 144 per share. This money will be used to fund various expansion projects which the company has currently lined up.

What to expect?
Hindalco has lined up robust capacity expansion plans in the aluminum segment. Going ahead, we believe the successful completion of projects and start up of the key mines feeding the expanded capacities will be the key to the absolute EBITDA growth of Hindalco. However the commissioning of Mahan smelter is believed to have been pushed back in FY13 due to regulatory hurdles. A decision on Mahan coal block is pending and Hindalco is looking for alternate alumina sources till Utkal Alumina is commissioned (expected by end-2012).The company will provide a review of its projects when it announces consolidated results. We believe, this would continue to be a concern for the company going forward.

At the current price of Rs 118, the stock trades at a P/BV multiple of 1.5x our standalone estimated FY14 book value per share. We maintain our positive view on the stock.

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