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Hindalco : Topline and Bottomline Up - Views on News from Equitymaster

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Hindalco : Topline and Bottomline Up
Aug 17, 2011

Hindalco has announced its standalone financial results for the quarter ended June 2012. The company has reported an increase of 16% YoY in net sales and an increase of 21% YoY in net profits respectively. Here is our analysis of the results:

Performance summary
  • Standalone topline grows by 16% YoY during 1QFY12 on back of higher LME.
  • EBITDA margin contracts to 14.4% during 1QFY12 from 16.1% in 1QFY11. This was due to strong inflationary pressures seen in energy products.
  • Net profits grow by 21 YoY during the quarter. Net margins increase by 3.7%.
  • Other income grows by a staggering 158%.


Standalone financial performance
(Rs m) 1QFY11 1QFY12 Change
Sales 51,783 60,309 16.5%
Expenditure 43,459 51,638 18.8%
Operating profit (EBDITA) 8,324 8,671 4.2%
Operating profit margin (%) 16.1% 14.4%  
Other income 690 1,779 157.9%
Depreciation 1,691 1,754 3.7%
Interest 593 667 12.5%
Profit before tax 6,730 8,029 19.3%
Tax 1,386 1,589 14.7%
Profit after tax/(loss) 5,344 6,440 20.5%
Net profit margin (%) 10.3% 10.7%  
No. of shares (m)   1,914.4  
Diluted earnings per share (Rs)   11.7  
P/E ratio (x)   12.3  
*trailing twelve month earnings

What has driven performance in FY2011?
  • During the quarter ended June 2011, Hindalco's topline grew by 16% YoY. Despite flat volumes and rising raw material costs, the growth was mainly driven by higher realizations on the back of higher LME. The growth was also led by increase in sales of aluminium and copper business which saw a rise of 12% YoY and 19% YoY.

  • However, despite improved operating efficiencies in both copper and aluminium business and higher value added by product credit and TcRc (Treatment and Refining charges) in copper business operating profit was only up by 4.2% YoY and operating margins declined from 16.1% in 1QFY11 to 14.4% in 1QFY12. This was because of increase in power and fuel costs which increased by 24.6% YoY and rising input costs as well as rupee appreciation.

    Cost break-up
    (Rs m) 1QFY11 1QFY12 Change
    Raw Materials 30223 38252 26.6%
    % of sales 58.4% 63.4%  
    Staff costs 2279 2501 9.7%
    % of sales 4.4% 4.1%  
    Power & fuel 5099 6353 24.6%
    % of sales 9.8% 10.5%  
    Other Expenditure 4868 4528 -7.0%
    % of sales 9.4% 7.5%  
    Purchase of traded goods 989 5  
    % of sales 1.9% 0.0%  
    Total operating cost 43458 51638 18.8%
    % of sales 83.9% 85.6%  

  • The other income increased sharply by 157.9% YoY during the quarter ended June 2011. This was due to an improved treasury yield and an increased corpus because of return of capital from Novelis. Other income also includes Rs 690 m dividend that it received from its Australian subsidiary Aditya Birla Minerals Ltd (ABML).

  • Net profits registered a rise of 21% YoY during the quarter. Net margins increased from 10.3% in 1QFY11 to 10.7% in 1QFY12.

  • Aluminium production was down this quarter compared to corresponding quarter last year. This was due to lower production at Renukoot plant because of lack of availability of bauxite.

What to expect?
The sovereign debt crisis in Europe and downgrade of USA may lead to more risk aversion in the financial markets and can have adverse impact on investment flows in commodities sector which could lead to lower aluminium and copper prices on the London Metal Exchange (LME). The company's US subsidiary Novelis had its best quarter ever, despite slowdown in US and European markets. The upward trends in the LME aluminium prices and also demand in the key markets in which Hindalco operates augur well for it. However, high input costs and uncertain regulatory environment as well as subdued profitability of the copper business will keep margins under pressure. The company's expansion projects are also progressing well and are expected to meet their deadlines. At the current price of Rs 145, the stock trades at a P/BV multiple of 1.2x its expected FY14 book value per share. We maintain our positive view on the stock.

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