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Hindalco: Operationally good, overall not so good - Views on News from Equitymaster

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Hindalco: Operationally good, overall not so good
Jun 3, 2014 | Updated on Jun 16, 2014

Hindalco has announced its March quarter results. The company has reported consolidated topline growth of 9% YoY while the bottomline has declined 28% YoY for the full year

Performance summary
  • Standalone topline for the quarter grows 21% YoY while bottomline falls 49% YoY mainly on account of extraordinary loss to the tune of Rs 4 bn. PBT, which excludes the impact of extraordinary is however up 10% YoY
  • Standalone topline for the full year grows 7% YoY while bottomline suffers a 17% fall due to higher interest and depreciation charges and also the extraordinary loss
  • Uninspiring performance from Novelis helps magnify consolidated bottomline fall to 28% for the full year on the back of a 9% growth in topline


Financial snapshot
  Standalone Consolidated
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change FY13 FY14 Change
Net sales 69,938 84,351 20.6% 260,569 278,509 6.9% 801,928 876,955 9.4%
Expenditure 63,505 75,910 19.5% 238,532 253,591 6.3% 723,560 794,092 9.7%
Operating profit (EBDITA) 6,432 8,441 31.2% 22,037 24,919 13.1% 78,368 82,863 5.7%
EBDITA margin (%) 9.2% 10.0%   8.5% 8.9%   9.8% 9.4%  
Other income 2,312 2,125 -8.1% 9,831 11,244 14.4% 10,122 10,172 0.5%
Interest (net) 1,577 2,146 36.1% 4,360 7,117 63.2% 20,791 27,016 29.9%
Depreciation 1,726 2,441 41.4% 7,042 8,233 16.9% 28,611 35,528 24.2%
Profit before tax 5,442 5,979 9.9% 20,466 20,814 1.7% 39,088 30,491 -22.0%
Extraordinary items   (3,960)     (3,960)     (3,960)  
Tax 621 (462) -174.4% 3,474 2,721 -21.7% 8,857 5,249 -40.7%
Profit after tax/(loss) 4,820 2,482 -48.5% 16,992 14,133 -16.8% 30,231 21,282 -29.6%
Share of loss of associate       - -   158 (668)  
Minority Interest       - -   (196) 200  
Net profit after minority interest 4,820 2,482 -48.5% 16,992 14,133 -16.8% 30,269 21,750 -28.1%
Net profit margin (%) 6.9% 2.9%   6.5% 5.1%   3.8% 2.5%  
No. of shares (m) 1,914.8 2,064.8   1,914.8 2,064.8   1,914.8 2,064.8  
Diluted earnings per share (Rs)*               10.5  
Price to earnings ratio (x)*               14.7  
(* on trailing twelve months earnings)

What has driven performance in 4QFY14?
  • During the quarter ended March 2014, Hindalco's topline increased by 20.6% YoY mainly on account of higher volumes. In the aluminum segment, both alumina and aluminum production stood at 465 KT & 175 KT and 1619 KT & 613 KT for 4QFY14 and FY14 respectively. The aluminum segment's net sales stood at Rs 30.25 bn in 4QFY14. For the full year, sales increased 14% YoY and stood at Rs 100.5 bn. The growth in revenue was due to higher volumes as the spot LME and exchange rate impact for FY14 pretty much nullified each other.

  • In the copper segment, copper cathode production increased by 4.4% YoY to 329 KT while DAP production increased by 9.6% YoY to 229 KT during FY14. The copper segment's net sales increased by 3% YoY.

  • Aluminum business' EBIT rose sharply in 4QFY14 to Rs 3.5 bn despite persisting energy cost pressures. The EBIT margin stood at 11.6%, highest for this year. For the copper division, the EBIT margin stood at 5.6%.

    Cost break-up (Standalone)
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Cost of materials consumed 47,143 55,980 18.7% 172,648 181,281 5.0%
    % sales 67.4% 66.4%   66.3% 65.1%  
    Employee benefits 2,895 3,505 21.1% 12,008  13,461 12.1%
    % sales 4.1% 4.2%   4.6% 4.8%  
    Power and fuel 7,544 9,206 22.0% 30,730  35,576 15.8%
    % sales 10.8% 10.9%   11.8% 12.8%  
    Other expenses  5,924 7,219 21.9% 23,145  23,272 0.5%
    % sales 8.5% 8.6%   8.9% 8.4%  
    Total Operating Cost  63,505 75,910 19.5% 238,532 253,591 6.3%
    % sales 90.8% 90.0%   91.5% 91.1%  

  • Overall, due to lower raw material cost (as a % of sales) and better performance from aluminum segment, the company's EBITDA increased by 31.2% YoY. The company's interest costs increased by 36.1% YoY. However, the company received a tax rebate of Rs 462 m during the quarter. The net profits declined 48.5% YoY due to exceptional losses of Rs 3,960 m pertaining to tax dispute in UP and MP.

  • The alumina output includes 277 KT at Utkal while the aluminum output includes 57 KT at Mahan & Aditya. With respect to Novelis it may be noted that the auto share in Novelis' overall portfolio stood at 6% and management targets to increase the same to >25% by the end of FY20.
What to expect?
Although Hindalco has expanded its aluminum capacity recently, volatile aluminum prices, sticky costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth. However, it may be noted that all the Greenfield projects of the company namely Aditya Aluminum, Utkal Alumina and Mahan Aluminum started the operations during the year and are in the process of ramping up.

The production at Mahan increased to 29 KT in 4QFY14 from 19KT in 3QFY14. The Utkal production is also gaining momentum and increased substantially to 147KT in 4QFY14 from 87 KT in 3QFY14. However, the biggest risk to this ramp up exercise is access to captive coal. If access gets interrupted production may get impacted.

At the current price of Rs 162, the stock trades at a multiple of 15 times its TTM P/E on a consolidated basis. Since our buy recommendation in January 2012, the stock has appreciated 37% odd. However, in light of the new developments we are likely to revise our target price. Until then we maintain our Hold view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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