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Indal: Volumes led growth

Aug 7, 2003

Indian Aluminium Company Ltd. (Indal), a 96% subsidiary of Hindalco, reported its June quarter performance recently. Despite a strong 23% topline growth, the company’s bottomline failed to respond. The company’s net profits grew by only 6%. However, it must be noted that compared to the last two quarters, the company’s performance has improved, especially the topline.

(Rs m)1QFY031QFY04Change
Sales 3,102 3,809 22.8%
Other Income 109 56 -48.8%
Expenditure 2,698 3,251 20.5%
Operating Profit (EBDIT) 404 558 38.1%
Operating Profit Margin (%)13.0%14.7% 
Interest 61 53 -12.9%
Depreciation 165 186 13.0%
Profit before Tax28737530.4%
Extraordinary items (6) - -100.0%
Tax 41 120 192.7%
Profit after Tax/(Loss) 240 255 6.0%
Net profit margin (%)7.7%6.7% 
No. of Shares 71.1 71.3  
Earnings per share13.514.3 
P/E Ratio  10.1  

The topline growth of the company showed an improvement of 23% YoY. This could partly be attributed to the fact that realisations have improved as the aluminium and alumina prices were ruling higher during the June quarter as compared to the prices prevailing in the corresponding quarter last year. Moreover, strong volumes growth on the alumina and the metal front further aided the topline. Also, the company’s continuous focus on value-added products, which have better realisations, seemed to be reaping benefits. Exports also showed a significant improvement. All of the above led to an improvement in operating margins for the quarter (up 170 basis points). However, the benefit of this failed to reflect on the bottomline owing to a considerable 21% increase in operating expenditure and due to a significantly higher provision for taxes.

Cost breakup
 1QFY031QFY04 % change
Raw material 1,141.2 1,019.1 -10.7%
Staff Costs 348.2 389.0 11.7%
Power & fuel 753.8 1,034.8 37.3%
Other Exp 708.4 846.1 19.4%
Total (% of sales) 95.1%86.3% 
Note: Total costs excludes change of stock-in-trade

As can be seen in the table above, though the expenditure increased 21% in absolute terms, expenditure as a percentage of sales has actually reduced from 95% to 86% YoY. However, the fact remains that there was a considerable rise in expenses related to power and fuel and other administrative expenditure. This was due to the Kerala government’s hike in power tariffs by 0.5 paise per unit, which affected the company’s power expenses adversely. As a result of this, the company’s smelter has become unviable and continues to suffer heavy financial losses. Hence, the company has decided to de-energize the smelter operations at Alupuram from August 1, 2003. Also, there was a 40% increase in power generation from the Hirakud captive power plant to support the increased metal production.

The interest outgo for the company was lower by 13%, as the company continues to take advantage of softer interest rates. The 13% increase in depreciation could partially be a factor of the company’s expansion of its smelting capacity.

At Rs 144, the stock is trading at a P/E multiple of 10.1x its 1QFY04 annualised earnings. Going forward, with the company’s expansion of its smelting capacity (at Hirakud, Orissa) to 65,000 MTPA, the company is well placed to reap the benefits of any upturn in aluminium demand, both domestic and international. Also, its expansion of captive power to support aluminium production will be reflected in the quarterly results in the form of lower power costs. The company has also increased its stake in Utkal Alumina to 55%, thus making Utkal its subsidiary and providing it with greater access to alumina. Moreover, the company will also benefit from its synergies with the parent company, Hindalco. Being a 96% subsidiary of the parent, the liquidity of the stock is very low. Moreover, despite Hindalco denying any near term merger plans, in the long term Indal is likely to get merged with the parent.

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