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Hindalco: Volumes aid growth
Aug 5, 2010

Hindalco has announced its 1QFY11 results. The company has reported a 33% YoY and 11% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline grows by 33% YoY during 1QFY11 driven by volumes and better realisations.
  • EBITDA margin contracts to 16.1% during the quarter from 19.4% in 1QFY10 primarily as other expenditure increases as a percentage of sales. Benefits of low-cost brownfield expansions and higher capacity utilisation kick in.
  • Other income declines by 9% during the quarter.
  • Standalone bottomline registers a growth of 11% YoY during 1QFY11 on account of higher topline growth and despite lower operating margins.

Standalone financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 38,969 51,783 32.9%
Expenditure 31,391 43,458 38.4%
Operating profit (EBDITA) 7,578 8,325 9.9%
EBDITA margin (%) 19.4% 16.1%  
Other income 753 689 -8.5%
Interest 682 593 -13.0%
Depreciation 1,653 1,691 2.3%
Profit before tax 5,996 6,730 12.2%
Tax 1,190 1,386  
Profit after tax/(loss) 4,806 5,344 11.2%
Net profit margin (%) 12.3% 10.3%  
No. of shares (m)   1,913  
Diluted earnings per share (Rs)*   10  
Price to earnings ratio (x)*   16.1  
* On trailing 12 months basis

What has driven performance in 1QFY11?
  • Hindalco posted a 33% YoY topline growth in 1QFY11 on a standalone basis. The performance was driven by higher volumes, better product and geographic mix and improved realisations. The company also benefitted from higher aluminium LME and better by-product realisation in its copper business.

  • Operations of aluminium Smelter at Hirakud were affected in July due to heavy rains and continual bad weather including lightning. A team of experts have now completed the assessment of the situation and have formulated an action plan for quick revival of operations as well as certain remedial actions for the future. In line with the action plan, currently under implementation, electrolytic cells taken out of circuit will be restarted in a phased manner. This exercise is expected to be completed by end of August. As a consequence of this unforeseen outage, Hirakud aluminium production is expected to be lower by around 20,000 MT for the current fiscal. Hindalco has a comprehensive mega insurance policy which covers property damage and business interruptions.

  • The company's low cost advantage arising from integration and captive coal for own power generation for the Hirakud smelter cushioned the adverse impact of spiralling cost escalations of crude and crude derivatives as well as purchased coal for Renukoot and plummeting copper treatment charges and refining charges.

    Cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 25,119 31,213 24.3%
    % sales 64.5% 60.3%  
    Staff cost 2,070 2,279 10.1%
    % sales 5.3% 4.4%  
    Power and fuel 4,210 5,099 21.1%
    % sales 10.8% 9.8%  
    Other expenditure (8) 4,867  
    % sales 0.0% 9.4%  
    Total cost 31,391 43,458 38.4%
    % sales 80.6% 83.9%  

  • Hindalco's other income and interest charges were constrained by lower returns on investment and lower average interest rate respectively.

What to expect?
World aluminium consumption is projected to grow at around 9% in 2010. Within India, the demand for aluminium continues to be strong from all the major consuming sectors, including electrical, transportation, buildings and construction sectors. The world copper market is in a surplus state, although in India there is strong demand from the infrastructure industries, particularly power and auto.

Hindalco currently has brownfield expansion projects in Hirakud, Belgaum and Mouda. Several greenfield projects are also underway such as Utkal Alumina in Rayagada, Orissa; Mahan Aluminium in Bargwan, MP; Aditya Aluminium in Orissa and Jharkhand Aluminium in Sonahatu, Jharkhand.

At current price of Rs 166, the stock is trading at a multiple of 1 times our expected FY13 book value per share. At this juncture prices fully reflect the underlying asset value leaving little room for a bargain for investors.

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