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Hindalco: Lower LME prices hurt sales

Aug 19, 2013 | Updated on Oct 30, 2019

Hindalco has announced its standalone financial results for the quarter ended June 2013. Net sales for the company declined by 3.2% YoY while net profits increased by 11.6% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company declined by 3.2% YoY on back of lower realisations.
  • Operating profits of the company increased by 3.3% YoY due to lower input costs. Operating margins were up by 0.5% YoY.
  • Net profit improved by 11.6% YoY during the quarter. Net margins increased by 1.1% YoY.

Standalone financial performance
(Rs m) 1QFY13 1QFY14 Change
Net sales 60,279 58,379 -3.2%
Expenditure 55,648 53,595 -3.7%
Operating profit (EBDITA) 4,631 4,785 3.3%
Operating profit margin (%) 7.7% 8.2%  
Other income 3,014 4,279 42.0%
Interest (net) 815 1,487 82.5%
Depreciation 1,705 1,831 7.4%
Profit before tax 5,126 5,746 12.1%
Exceptional Item - -  
Tax 878 1,005 14.4%
Profit after tax/(loss) 4,248 4,741 11.6%
Net profit margin (%) 7.0% 8.1%
No. of shares (m) - 1,915  
Diluted earnings per share (Rs)   8.9  
P/E ratio (x)*   10.6  
*trailing twelve month earnings

What has driven performance in 1QFY14?
  • During the quarter ended June 2013, Hindalco's topline declined by 3.2% YoY mainly on account of lower realizations. In the aluminium segment, both alumina and aluminium production increased by 3.9% and 5.3% YoY each to 348 kt and 139 kt respectively. The aluminium segment's net sales increased by 7.2% YoY due to higher volumes. In the copper segment, copper cathode production decreased by 1.4% YoY to 68 kt and this coupled with lower metal prices led to the copper segment's net sales decreasing by 8.5% YoY. Planned copper smelter shutdown resulted in 4% YoY decline in copper volumes.

    Cost break-up
    (Rs m) 1QFY13 1QFY14 Change
    Raw Materials 36,496 29,935 -18.0%
    % of sales 60.5% 51.3%  
    Staff costs 2,902 3,024 4.2%
    % of sales 4.8% 5.2%  
    Power & fuel 7,573 8,062 6.5%
    % of sales 12.6% 13.8%  
    Other Expenditure 6,222 5,801 -6.8%
    % of sales 10.3% 9.9%  
    Purchase of traded goods 2,455 6,772 175.9%
    % of sales 4.1% 11.6%  
    Total operating cost 55,648 53,595 -3.7%
    % of sales 92.3% 91.8%  

  • On the operating front, aluminium segment's EBIT decreased by 7.8% YoY due to increase in input costs. Copper segment's EBIT however, increased by 7.2% YoY. Overall, Hindalco's raw material costs increased by 18% YoY but other expenses decreased by 6.8% YoY, respectively. Hence, its EBITDA increased 3.3% YoY.

  • Net profits increased by 11.6% YoY. This was due to increase in other income which was up by 42% YoY. Other income was boosted by Rs 1.03 bn non-recurring income and Rs 1 bn dividend from subsidiary.

  • During the quarter, the company started trial-run production from its Mahan smelter while the Utkal refinery commenced production. The Aditya smelter is in an advanced stage of completion (the company has already spent over Rs 100 bn). The company stated that it is re-evaluating its strategy for Aditya refinery and Jharkhand aluminium projects considering the delays in obtaining regulatory approvals and uncertain economic environment. We believe the projects are likely to be delayed indefinitely. Deferring/shelving of these projects will positively address the ballooning CWIP (capital work in progress) concerns for the company.

What to expect?

Although Hindalco has expanded its aluminium capacity recently, low aluminium prices, sticky costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth. In the near-term, there is lack of clarity over production from the Mahan coal block for its Mahan smelter. Without captive coal block, the Mahan smelter (commissioned production in 1QFY14) is expected to face cost pressures, resulting in lower return ratios over the next two years.

Management once again deviated from its practice of providing full-year guidance, which it attributes to limited visibility on costs associated with commissioning of new facilities and pricing pressure in several regions. While the company did not give explicit guidance (adjusted EBITDA) for FY14, it did confirm that directionally it could likely be flattish to down. In addition the company guided to no dividend to be released to Hindalco even in FY14, as the company remains in capex mode.

At the current price of Rs 94, the stock trades at a multiple of 10.6 times its TTM P/E on a standalone basis. We maintain our Buy view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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Jun 22, 2021 11:06 AM


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