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Hindalco: Exceptional losses hurt profits - Views on News from Equitymaster
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Hindalco: Exceptional losses hurt profits
Jun 12, 2015

Hindalco has announced its standalone financial results for the quarter ended March 2015. Net sales for the company increased by 11.1% YoY while net profits declined by 35.7% YoY. Here is our analysis of the results.

Performance summary
  • Topline of the company increased by 11.1% YoY.
  • Operating profits of the company increased by 0.4% YoY as rising coal costs hurt profitability.
  • A modest operating performance coupled with a 117.3% YoY rise in interest costs led to a decline in profits by 35.7% YoY. After adjusting for exceptional items, profits were down by 52.5% YoY.
  • The standalone D/E ratio of the company stood at 0.77x at the end of the year.
  • The board has recommended a dividend of Rs 1 per share.
  • The company allotted 392,514 shares to its employees pursuant to the exercise of ESOPs which led to an increase in share capital during the year.

Standalone financial results
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 84,351 93,716 11.1% 278,509 345,250 24.0%
Expenditure 75,910 85,238 12.3% 253,591 311,085 22.7%
Operating profit (EBDITA) 8,441 8,478 0.4% 24,919 34,165 37.1%
EBDITA margin (%) 10.0% 9.0%   8.9% 9.9%  
Other income 2,125 2,301 8.3% 11,244 8,822 -21.5%
Interest (net) 2,146 4,663 117.3% 7,117 16,371 130.0%
Depreciation 2,441 2,377 -2.6% 8,233 8,370 1.7%
Profit before tax 5,979 3,739 -37.5% 20,814 18,246 -12.3%
Exceptional items  3,960 1,465 -63.0% 3,960 5,777 45.9%
Tax (462.1) 678.40 NM 2,721 3,218 18.3%
Profit after tax/(loss)  2,482 1,595 -35.7% 14,133 9,252 -34.5%
Net profit margin (%) 2.9% 1.7%   5.1% 2.7%  
No. of shares (m)         2,065.0  
Diluted earnings per share (Rs)         4.5  
Price to earnings ratio (x)*         27  
(*on trailing twelve months earnings)

What has driven performance in 4QFY15?
  • During 4QFY15, Hindalco's topline increased by 11.1% YoY. For the full year, revenues were up 24% YoY due to strong production with record volumes in both the aluminum and copper business. Even Novelis performed well as shipments increased in all regions.

  • The alumina production (including Utkal) was at 2259 KT during the year compared to 1619 KT in FY14. Production from greenfield sites was up by almost 4 times. Utkal production stood at 316 KT while the ramp up at the Mahan smelter too gathered pace with output of 58 KT in 4QFY15. The aluminum production stood at 836 KT in FY15, up 37% YoY.

  • In the copper segment, copper cathode production increased by 7% YoY to 100 KT while DAP production increased by 93% YoY to 107 KT during 4QFY15. The copper segment's net sales increased by 15% YoY to Rs 204.5 bn in FY15.

  • Aluminum business' EBIT fell to Rs 3.06 bn in 4QFY15 from Rs 3.84 bn in 3QFY15. Copper business' EBIT stood at Rs 3.90 bn in 4QFY15.
What to expect?
At the current price of Rs 120, the stock trades at 10.4 times and 0.59 times its FY17 earnings and FY17 book value respectively. During the current year, sales growth was driven by higher volumes due to a ramp up in production at new smelters & substantial pick up in greenfield sites. Despite strong topline growth profitability suffered due to higher interest costs and exceptional losses arising from additional levy on coal due to a Supreme Court order.

Realizations from the aluminum division increased but cost of coal remained at elevated levels as well. The company also acquired 4 coal blocks after the auctions came to an end securing almost 30% of its requirements. Production capacity at the both the smelters (Mahan & Aditya) have been ramping up. Even the Utkal plant is operating close to full capacity utilization levels. Novelis has also showed strong signs of growth during the year. Though the current year profitability was hit, it was due to exceptional losses and thus is expected to normalize from next year onwards. Taking into considerations these factors 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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