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Hindalco : Aluminium to the rescue - Views on News from Equitymaster
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Hindalco : Aluminium to the rescue
Jul 28, 2008

Performance summary
  • Net sales of the company remain flat on the back of subdued performance of the copper business.

  • Operating margins increase by 140 bps led mainly by lower raw material costs.

  • Strong growth in other income apart from operating margin expansion helps the company post a decent 16% YoY growth in bottomline during the quarter.



(Rs m) 1QFY08 1QFY09 Change
Net sales 46,779 46,475 -0.6%
Expenditure 37,936 36,984 -2.5%
Operating profit (EBDITA) 8,843 9,491 7.3%
EBDITA margin (%) 18.9% 20.4%  
Other income 1,246 2,147 72.3%
Interest (net) 562 761 35.4%
Depreciation 1,428 1,568 9.8%
Profit before tax 8,099 9,308 14.9%
Extraordinary income/(expense) - -  
Tax 2,070 2,340 13.1%
Profit after tax/(loss) 6,029 6,968 15.6%
Net profit margin (%) 12.9% 15.0%  
No. of shares (m) 1,111.0 1,226.5  
Diluted earnings per share (Rs)*   24.1  
Price to earnings ratio (x)*   6.1  
(* on trailing twelve months earnings)

What has driven performance in 1QFY09?
Let us have a look as to how the two main segments of the company viz Aluminium and Copper performed during the quarter.

Aluminium: The segment accounted for 42% of company’s total revenues during the quarter, greater by 5% as compared to 1QFY08. The revenues grew by 11% on a YoY basis, mainly led by higher volumes and higher LME prices. The cash prices of aluminum showed an increase of 7% on a YoY basis. The profit before interest and taxes also increased by 17% on a YoY basis on account of higher realizations.

Copper: The segment accounted for 58% of company’s total revenues during the quarter, decline of 5% as compared to 1QFY08. The revenues declined by 8% on a YoY basis, mainly on account of lower volumes due to planned shut down of smelter I at Dahej. Furthermore, the profit before interest and taxes declined by 34% on a YoY basis due to the continuous depreciation of rupee against the dollar. Also, the cut in the smelting fees, which it charges the mining companies to convert ore into metal, has affected its earnings adversely. As per reports, it accepted a 25% reduction in the fee it charges to BHP Billiton for processing copper.

Segmental break-up…
(Rs m) 1QFY08 1QFY09 Change
Aluminium
Revenues 17,537 19,430 10.8%
PBIT 6,420 7,504 16.9%
PBIT margin 36.6% 38.6%  
Copper
Revenues 29,262 27,066 -7.5%
PBIT 1,123 743 -33.8%
PBIT margin 3.8% 2.7%  

On the operating front, operating profits grew by 7% on a YoY basis. The operating margins expanded by 140 bps to 20.4% backed by lower raw material costs. The overall expenditure showed a decline of 2.5% on a YoY basis.

Cost break-up...
(Rs m) 1QFY08 1QFY09 Change
Raw materials 28,788 26,942 -6.4%
% sales 61.5% 58.0%  
Staff cost 1,321 1,494 13.1%
% sales 2.8% 3.2%  
Power and fuel 4,230 5,544 31.1%
% sales 9.0% 11.9%  
Other expenses 3,597 3,006 -16.4%
% sales 7.7% 6.5%  

The bottomline of the company showed a growth of 16% on a YoY basis, greater than operating profits. Besides improved operating performance, a 72% jump in other income and benign growth in depreciation also aided the improvement in bottomline.

What to expect?
At the price of Rs. 146, the stock is trading at a price to book value multiple of 0.9x the company’s expected FY10 book value per share. The company’s performance has come in slightly better than our bottomline projection of 13% for the full year. However, these are early days yet and it remains to be seen whether Hindalco will be able to maintain its performance for the remainder of the year. While we do not feel the need to revise our assumption on the operating performance front, we will shortly come out with an updated report with appropriate changes made to company’s capital structure.

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