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Hindalco: Copper capers - Views on News from Equitymaster
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Hindalco: Copper capers
Aug 1, 2007

Performance summary
  • Net sales grow 9.5% YoY, driven by higher aluminium and copper sales.

  • Spiraling costs lead to a 5% YoY drop in operating profits as margins contract by 290 basis points.

  • A 61% jump in other income helps bottomline post marginal growth over the corresponding previous quarter.

(Rs m) 1QFY07 1QFY08 Change
Net sales 42,737 46,779 9.5%
Expenditure 33,403 37,936 13.6%
Operating profit (EBDITA) 9,334 8,843 -5.3%
EBDITA margin (%) 21.8% 18.9%  
Other income 776 1,246 60.6%
Interest (net) (634) (562)  
Depreciation 1,341 1,428 6.5%
Profit before tax 8,135 8,099 -0.4%
Extraordinary income/(expense) - -  
Tax 2,120 2,070 -2.4%
Profit after tax/(loss) 6,015 6,029 0.2%
Net profit margin (%) 14.1% 12.9%  
No. of shares (m) 1,159.3 1,227.1  
Diluted earnings per share (Rs)* 19.6 19.7  
Price to earnings ratio (x)**      
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Hindalco, an AV Birla Group company, is India’s largest aluminium producer and has the distinction of being one of the lowest cost producers of the metal in the world. It is an integrated player, having captive bauxite mines, power units and high value-added output comprising semi-fabricated aluminium products. Its integrated operations and operating efficiency have positioned the company as Asia's largest integrated primary producer of aluminium and among the most cost efficient producers globally. Its copper smelter is today the world's largest custom smelter at a single location. The company has a significant market share in all the segments in which it operates. It enjoys a domestic market share of 42% in primary aluminium. The company also has a significant presence in the copper segment.

What has driven performance in 1QFY08?
Copper shines, Alumina disappoints: 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 37% of the company’s total revenues during the quarter as opposed to 39% in 1QFY07. Not surprisingly then, the growth in revenues was lower than the company’s total revenues. While the 6% YoY growth in revenues was still okay, it is the 10% YoY drop in segmental PBIT that really impacted the company’s performance. A sharp appreciation of rupee against the dollar, fall in custom duty and sharp fall in alumina realization were the key reasons behind the poor performance of the division. On the positive side, the aluminium business of the company benefited from higher volumes and realizations. However, it was still not enough to save the segmental profits from registering a negative growth rate.

Copper: The continued strong performance of the copper division did provide some solace to the overall performance of the company. Not only did the revenues grow 12% YoY but the segmental margins also improved albeit marginally. Although rising rupee did affect this segment, the impact was more than offset by operational efficiencies and higher TcRc (Treatment charges and refining charges, the key factor that determines the profitability of the copper business).

Segmental break-up…
(Rs m)      
Aluminium 1QFY07 1QFY08 Change
Revenues 16,542 17,537 6.0%
PBIT 7,125 6,423 -9.9%
PBIT margin 43.1% 36.6%  
Copper      
Revenues 26,217 29,262 11.6%
PBIT 978 1,123 14.8%
PBIT margin 3.7% 3.8%  

As far as the overall EBITDA margins of the company are concerned, barring power and fuel costs, all the other three cost heads witnessed significant appreciation and hence, pulled down the margins by a significant 290 basis points. On the other hand, an 11% YoY drop in power and fuel costs was driven by increased use of captive resources as opposed to the state grid, which is relatively more expensive.

cost break up
(Rs m) 1QFY07 1QFY08 Change
Raw materials 24,651 28,788 16.8%
% sales 57.7% 61.5%  
Staff cost 1,149 1,321 15.0%
% sales 2.7% 2.8%  
Power and fuel 4,747 4,230 -10.9%
% sales 11.1% 9.0%  
Other expenses 2,856 3,597 25.9%
% sales 6.7% 7.7%  

Growth in the bottomline at 0.2% has been better than the performance at the operating level where profits fell 5% YoY. A 61% YoY jump in other income and a 11% YoY fall in the interest expense were the key factors responsible for the same. The fact that the depreciation charges increased only moderately also helped. Net profit margins though were lower by 120 basis points.

In recent quarters
As seen from the table below, rising rupee and inflation have been hurting the margins of the company. Further, with metal prices not moving as sharply as in the past, Hindalco has had no option but to take a hit on profitability.

over the last few quarters
  1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Net sales (YoY growth %) 93.6% 74.2% 62.1% 29.8% 9.5%
OPM 21.8% 21.3% 22.4% 12.9% 18.9%
NPM 14.1% 12.9% 13.8% 15.2% 12.9%

What to expect?
At the current price of Rs 163, the stock is trading at a multiple of 8 times its annualised 1QFY08 earnings. We are in the process of updating our research report on the company and will soon come out with our forward estimates for the same.

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