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Hindalco: Topline grows but margins drop - Views on News from Equitymaster

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Hindalco: Topline grows but margins drop

May 11, 2011

Hindalco has announced its standalone financial results for the quarter and year ended March 2011. The company has reported a growth of 22% YoY and 12% YoY in net sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Standalone topline grows by 26.4% YoY during 4QFY11 driven by better realisations.
  • EBITDA margin contracts to 12.3% during 4QFY11 from 14.8% in 4QFY10.
  • Net profits grow by 6.7% YoY during the quarter. Net margins drop by 2%.
  • During FY11, sales and net profits grow by 21.8% YoY and 11.6% YoY respectively.

Standalone numbers
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 53,507 67,608 26.4% 193,938 236,269 21.8%
Expenditure 45,613 59,319 30.0% 165,722 206,738 24.7%
Operating profit (EBITDA) 7,894 8,288 5.0% 28,217 29,531 4.7%
EBITDA margin 14.8% 12.3%   14.5% 12.5%  
Other income 1236 1908 54.4% 3,881 5,491 41.5%
Interest 705 564 -20.0% 2,780 2,200 -20.9%
Depreciation 1684 1760 4.5% 6,672 6,875 3.0%
Profit before tax/(loss) 6,741 7,872 16.8% 22,646 25,947 14.6%
Tax 102 789 676.4% 3,489 4,578 31.2%
Effective tax rate 2% 10%   15% 18%  
Profit after tax/(loss) 6,639 7,084 6.7% 19,156 21,369 11.6%
Net profit margin 12.4% 10.5%   9.9% 9.0%  
No of shares (m)         1914.6  
Diluted EPS (Rs)*         11.2  
P/E (times)*         18.4  
*trailing twelve month earnings

What has driven performance in FY2011?
  • During the financial year ended March 2011, Hindalco's topline registered a rise of 21.8% YoY. The growth was mainly driven by highest ever copper volumes, better product and geographical mix, and improved realisations as a result of higher commodity prices.

  • However, higher input costs, lower TcRc (Treatment charges/ Refining charges) in the copper business and one-time disruption at the Hirakud plant caused operating expenditure to grow at a higher rate of 24.7% YoY during the year. As a result, operating margins dropped from 14.5% in FY10 to 12.5% in FY11.

    Cost break-up
    (Rs m) FY10 FY11 Change
    Raw material 124,704 151,363 21.4%
    % sales 64.3% 64.1%  
    Staff cost 8700 10401 19.5%
    % sales 4.5% 4.4%  
    Power and fuel 19380 22215 14.6%
    % sales 10.0% 9.4%  
    Other expenditure 12217 17537 43.5%
    % sales 6.3% 7.4%  
    Purchase of traded goods 720 5,222  
    % sales 0.4% 2.2%  
    Total operating cost 165,722 206,738 24.7%
    % sales 85.5% 87.5%  

  • The other income increased sharply by 41.5% YoY during the year due to better yields. Also, after Novelis returned the capital, the treasury corpus was much higher. Interest expenses declined by 20.9% YoY on account of lower working capital borrowing and lower international interest rates.

  • Net profits registered a rise of 11.6% YoY during the year. Net margins declined from 9.9% in FY10 to 9% in FY11.

  • As part of its massive expansion programme, Hindalco is setting up a Greenfield aluminium smelter project in Madhya Pradesh (Mahan Project). The smelter will have a capacity of 359,000 tonnes per annum (TPA) and will be supported by 900 MW captive power plant. The total cost of the project is Rs 105 bn which also includes the financing cost. The company has already achieved financial closure of Rs 78.8 bn which forms the total debt portion of the project.

What to expect?
The year gone by witnessed a rebound in global aluminium demand. The Indian aluminium industry has also witnessed a positive demand trend. The same is expected to continue as there is immense potential for growth in domestic consumption.

International aluminium prices also rose substantially on account of the continued recovery in demand and strong interest by financial investors. The upward trends in the LME aluminium prices and also demand in the key markets in which Hindalco operates augur well for it. However, high input costs and subdued profitability of the copper business will keep margins under pressure.

At the current price of Rs 205, the stock trades at a P/BV multiple of 1.2x its expected FY13 book value per share. We maintain our negative view on the stock as we believe most of the medium term upside is fully captured into the current price.

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