Hindalco: Copper plays spoilsport

Hindalco, the A.V.Birla Group company, and India's largest private sector aluminium producer, announced its 1QFY04 results. For 1QFY04, Hindalco has disappointed by registering a 2% fall in bottomline on the back of a 4% fall in topline. The operating margins of the company have also fallen by 100 basis points. However, the culprit for this lackluster performance by the company has been the recently merged copper business.

(Rs m)	1QFY03	1QFY04	Change
Net Sales	11,979	11,555	-3.5%
Other Income	440	799	81.6%
Expenditure	8,505	8,323	-2.1%
Operating Profit (EBDIT)	3,474	3,232	-7.0%
Operating Profit Margin (%)	29.0%	28.0%
Interest	351	451	28.5%
Depreciation	633	717	13.3%
Profit before Tax	2,930	2,863	-2.3%
Tax	963	933	-3.1%
Profit after Tax/(Loss)	1,967	1,930	-1.9%
Net profit margin (%)	16.4%	16.7%
No. of Shares	92.5	92.5
Diluted Earnings per share*	85.1	83.5
P/E Ratio		9.8
(annualised)

It must be noted that the current quarter results include the merged copper business of the company and the results for the corresponding quarter last year has been re-stated to include the copper business and make the numbers comparable with this quarter.

	Aluminium			Copper
(Rs m)	1QFY03	1QFY04	% Change	1QFY03	1QFY04	% Change
Sales (MT)	66,307	75,251	13.5%	44,508	36,766	-17.4%
Net Sales	5,860	6,644	13.4%	6,119	4,911	-19.7%
Operating expenditure	3,588	4,160	15.9%	4,907	4,122	-16.0%
Operating Profits	2,294	2,531	10.3%	1,251	859	-31.3%
Operating Profit Margin (%)	39%	38%		20%	17%

The topline of the company comprises of two business segments: aluminium and copper. And it is the performance of the copper business that has adversely affected the overall performance of the company. A snapshot of the performance of the two segments can be seen in the table above. While, the aluminium division has managed to increase sales on the volumes as well as value front, copper division has taken a hit on the same. Aluminium production was higher by 18% as the company has completed its capacity expansion. Whereas, a planned bi-annual shutdown undertaken by the company in May-June for its copper division, affected not only the production but also copper sales.

Operating margins for the aluminium business fell by about 1% during the quarter, while the fall for the copper segment was a higher 3%. It must be noted that the realisations for both, aluminium (down marginally) and copper (down 3%) have taken a hit. Also despite international average aluminium prices showing a YoY increase, the company's realisations took a hit primarily due to two reasons. For one, while Hindalco's export volumes soared a good 21%, appreciation of the rupee against the dollar seems to have affected adversely. On the domestic front also, a 12% increase in volume sales were made amidst intense competition. For copper, export and domestic volume sales fell by 7% and 24% respectively.

(Rs m)	1QFY03	1QFY04	% Change
Raw material	5,992	5,208	-13.1%
Staff costs	523	585	11.9%
Mfg. expenses	2,103	2,354	11.9%
Other expenses	710	661	-6.9%
Total expenses (% of sales)	77.9%	76.2%

At Rs 818, the stock is trading at a P/E multiple of 9.8x its 1QFY04 annualised earnings. The outlook for the company (both for aluminium and copper) looks promising on the back of a global economic recovery and a stronger domestic economic growth now that monsoons have been good. Impressive growth in transport, construction and packaging sectors bode well for the company. Moreover, the passage of the Electricity Bill augurs well for Hindalco, as power is the largest consumer of aluminium (37%). Moreover, with increased metal production capacities, the company seems well placed to capitalize on any economic and industrial upturn. Further concentration on the high value-added products segments should help the company improve margins. China's growth could also help sustain the demand for the two commodities at the international level.

However, a cause of concern would be the current high prices for both the commodities. We expect aluminium prices to settle at around US$ 1,400 (current US$ 1,475) while copper prices could settle at around US$ 1,700 levels (current US$ 1,780). Moreover, since the sector's performance hinges on economic recovery, the mixed signals being received from larger economies like the US and Europe tend to create some uncertainty for the sector.