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Indal: Unexpected dip

Jul 31, 2002

In the fourth quarter of FY02, Indian Aluminium Company Ltd. (Indal) reported sales growth of 9.5% YoY. The company surprisingly has reported a drop in turnover for the quarter ended June '02. Despite the challenges in FY02 -- lower realisations and industrial slowdown -- Indal reported higher sales for all quarters.

(Rs m) 1QFY02 1QFY03 Change
Sales 3,323 3,102 -6.6%
Other Income 47 109 135.1%
Expenditure 2,734 2,698 -1.3%
Operating Profit (EBDIT) 588 404 -31.3%
Operating Profit Margin (%) 17.7% 13.0%  
Interest 92 61 -33.3%
Depreciation 155 165 6.5%
Profit before Tax 388 287 -26.0%
Extraordinary items (17) (6) -63.3%
Tax 85 41 -51.5%
Profit after Tax/(Loss) 287 240 -16.3%
Net profit margin (%) 8.6% 8.5%  
No. of Shares 71.1 71.1  
Earnings per share 16.1 13.5  
P/E Ratio   8.7  

The poor performance in 1QFY03, as per the company, is due to operations at Hirakud smelter being disrupted by a storm at the end of May '02. The smelter unit reportedly was out of commission for 24 days and recommenced operations in June '02. However, one would have expected inventories to decrease with production under constraint, which is not the case.

The alumina and chemicals business has performed well with caustic soda prices declining and a favourable product mix. Operating profits have taken a hit with lower sales and reduced margins. International aluminium prices during 1QFY03 were lower by an estimated 10% YoY. This is likely to have put pressure on margins. Alumina prices are not expected to have declined to the same extent as aluminium. Also, power costs of the company has increased at the sheet plant at Belur, West Bengal and smelter plant at Alupuram, Kerala. Power costs, which account for a quarter of operating expenses, has increased by 12% YoY. Staff costs have also increased sizably, which could be due to the merger of Annapurna Foils Ltd. (AFL) with Indal effective from April 1 2002.

Going forward, Indal is addressing smelting capacity constraints by nearly doubling capacity at Hirakud, Orissa to 57,000 metric tonnes per annum (MTPA). This is largely through the transfer of pots from the closed Belgaum, Karnataka unit. Commercial production from enhanced capacity is likely to start by end of FY03. Capitive power at Hirakud is also being augmented to support the higher aluminium production. The merger with Annapurna Foils Ltd. (AFL) has resulted result in an additional 4,000 MTPA of foil capacity. With an expected global & domestic economic turnaround, we expected performance if FY03 to be driven by improved realisations, better sheet and foil volumes and possibly lower raw material costs. The company is likely to reverse performance in the coming quarters.

At Rs 115 the scrip is trading on a multiple of 8.7x 1QFY03 annualised earnings. The scrip trades in a band of 4x-6x. The higher valuations is due to an open offer by Hindalco Industries Ltd. for acquiring the outstanding non-promoter shareholding. Post open offer, in case promoter shareholding exceeds 90%, the management plans to de-list Indal and operate it as a 100% subsidiary of Hindalco. Shareholders could take part in Indal's performance through Hindalco. That said, 1QFY03 performance is due to non-recurring, exogenous factors and should not influence investors to accept the open offer.


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