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Hindalco: Higher volumes kick in
May 13, 2010

Hindalco has announced its FY10 results. The company has reported a 7% YoY growth and 14% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline grows by 43% YoY during 4QFY10 driven by better mix and realisations.
  • EBITDA margin expands to 16% during the quarter from 8% in 4QFY09 primarily as raw material cost decreases by 4% as a percentage of sales. Benefits of low-cost brownfield expansions and higher capacity utilisation kick in.
  • Other income declines by 18% during the quarter.
  • Standalone bottomline registers a growth of 147% YoY during 4QFY10 on account of higher operating margins despite a higher tax outgo.


Standalone Financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 37,718 54,044 43.3% 182,197 195,363 7.2%
Expenditure 34,575 45,690 32.1% 151,838 165,864 9.2%
Operating profit (EBDITA) 3,142 8,354 165.8% 30,359 29,499 -2.8%
EBDITA margin (%) 8.3% 15.5%   16.7% 15.1%  
Other income 947 777 -18.0% 6,367 2,599 -59.2%
Interest 821 705 -14.1% 3,369 2,780 -17.5%
Depreciation 1,682 1,684 0.1% 6,453 6,672 3.4%
Profit before tax 1,586 6,741 324.9% 26,903 22,646 -15.8%
Tax (1,101) 102   4,601 3,489 -24.2%
Profit after tax/(loss) 2,688 6,639 147.0% 22,303 19,156 -14.1%
Net profit margin (%) 7.1% 12.3%   12.2% 9.8%  
No. of shares (m)         1,914  
Diluted earnings per share (Rs)       10  
Price to earnings ratio (x)         17.0  

What has driven performance in FY10?
  • Hindalco posted a 7% YoY topline growth in FY10 on a standalone basis. The company's performance was helped by its highest ever metal volumes and a better product and geographic mix. However, the company faced adverse macro-economic factors in both its businesses. In the aluminium business, lower LME eroded around Rs 7.5 bn. Additionally Rs 1 bn was lost on account of the higher coal cost at Renusagar. The copper business lost Rs 7.5 bn on lower by-product credit in terms of sulphuric acid realisation and lower fertiliser subsidy.

  • On the volumes front in the aluminium business, the capacity expansion at Muri and Hirakud resulted in a 52% rise in alumina production at Muri and metal production by 16% at Hirakud in FY10. The total alumina and metal production grew by 6% YoY in FY10. In the copper business, copper cathodes production grew by 12% YoY, while value added cc rods production grew by 7% YoY during the year.

  • On the cost front, Hindalco benefitted from the low-cost brownfield expansions and higher capacity utilisation during 4QFY10. That helped the company counter higher coal price in the aluminium business and lower byproduct credit in the copper business.

    Cost break-up
    (Rs m) 4QFY09 4QFY10 Change
    Raw materials  25,117  33,700 34.2%
    % sales 66.6% 62.4%  
    Staff cost     2,087     2,226 6.7%
    % sales 5.5% 4.1%  
    Power and fuel     4,073     4,843 18.9%
    % sales 10.8% 9.0%  
    Other expenditure     3,299     4,921 49.2%
    % sales 8.7% 9.1%  
    Total cost  34,575  45,690 32.1%
    % sales 91.7% 84.5%  

  • Hindalco's other income declined 59% YoY during FY10 on account of low treasury corpus after the repayment of bridge loan in Nov-08 taken for Novelis acquisition and higher project spending. Low short-term rates affected yields on the company's investments which are mostly in liquid plans. Incidentally, it also reduced the company's interest costs on working capital, which fell by 18% during FY10.

  • Hindalco posted a 14% YoY decline in bottomline during FY10 due to lower operating margins and other income despite lower interest costs and tax outgo.

What to expect?
World aluminium consumption is projected to grow at around 9% in 2010. Within India, the demand for aluminium continues to be strong from all the major consuming sectors, including electrical, transportation, buildings and construction sectors. The world copper market is in a surplus state, although in India there is strong demand from the infrastructure industries, particularly power and auto.

Hindalco currently has brownfield expansion projects in Hirakud, Belgaum and Mouda. Several greenfield projects are also underway such as Utkal Alumina in Rayagada, Orissa; Mahan Aluminium in Bargwan, MP; Aditya Aluminium in Orissa and Jharkhand Aluminium in Sonahatu, Jharkhand.

At current price of Rs 170, the stock is trading at a multiple of 1.1 times our expected FY12 book value per share. While the topline growth has exceeded our estimates, the bottomline has been lower than our estimates. However we believe that it will not significantly affect our medium term price target as we use asset based valuation method to value the company. At this juncture however, prices fully reflect the underlying asset value leaving little room for a bargain for investors.

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