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Hindalco: Pressure on realisations

Aug 1, 2001

Hindalco Industries Limited has posted an 8% decline in net profit to Rs 1,611 m for the quarter ended June 30, 2001. Net sales declined by nearly 3% to Rs 5.5 bn during the quarter. Other income saw a marginal 6% jump during the period under consideration.

(Rs m)1QFY011QFY02Change
Net Sales5,6525,490-2.9%
Other Income3073266.2%
Expenditure2,9572,9700.4%
Operating Profit (EBDIT)2,6952,520-6.5%
Operating Profit Margin (%)47.7%45.9%
Interest 161104-35.4%
Depreciation3533704.8%
Profit before Tax2,4882,372-4.7%
Tax730650-11.0%
Provisions and contigencies111
Profit after Tax/(Loss)1,7581,611-8.4%
Net profit margin (%)31.1%29.3%
Diluted no. of Shares (eoy) (m)74.574.5
Diluted Earnings per share*94.486.5
*(annualised)
Current P/e ratio8.7

The company has provided for Rs 111 m towards provision for deferred tax during the quarter. Even if we remove this provision, the net profit has still shown a decline of 2%. As per the AS-22, cumulative net deferred tax liability upto March, 2001 works out to Rs 2.7 bn. Hindalco is meeting the same out of revenue reserves. The company was saved from further decline in profits owing to lower interest and taxation burden.

The company's first quarter performance was under pressure largely on account of lower aluminium prices, which put realisations under pressure. Aluminium prices on LME have come down to the level of US$ 1,400 per tonne from about US$ 1,550 per tonne three months back. However, the company did well to maintain its net margins at similar levels as compared to the FY01 performance.

To overcome the current constraints Hindalco has announced a brownfield expansion plan at its Renukoot facility. It aims to increase smelter capacity by 100,000 tonnes per annum (TPA) and alumina refining capacity by 210,000 TPA. Aluminium being a power intensive industry the company has also planned to augment its power generating capacity to 796 mega watts (MW) for meeting the increased requirements. The expansion is anticipated to be completed by 2003-04.

At the current price of Rs 750, Hindalco trades at a P/e multiple of nearly 9 times its first quarter annualised earnings. One should keep in mind that the company's future realisations depend on the international aluminium prices. Considering the current grim scenario, the prices are unlikely to move up any time soon. Therefore, in the near term, the stock may remain under pressure. However, in the longer term, the company's inherent strengths relating to business focus and expansion plans would stand it in good stead.

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