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Hindalco: Cost pressures mar profitability - Views on News from Equitymaster

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Hindalco: Cost pressures mar profitability
Aug 21, 2012

Hindalco has announced its standalone financial results for the quarter ended June 2012. Net sales for the company remained flat as compared to the same quarter last year while net profits declined by 34% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company remained flat on back of lower volumes and lower LME aluminium prices.
  • Operating profits of the company declined by 46.5% YoY due to high input costs. Operating margins were down by 6% YoY.
  • Net profit declined by 34% YoY during the quarter. Net margins declined by 3.7% YoY.
  • Other income grows by 68.7% YoY. This was due to the dividend income received from its subsidiary, Dahej Harbour and Aditya Birla Mineral Limited (ABML).

Standalone financial performance
(Rs m) 1QFY12 1QFY13 Change
Sales 60,309 60,279 0.0%
Expenditure 51,646 55,648 7.7%
Operating profit (EBDITA) 8,663 4,631 -46.5%
Operating profit margin (%) 14% 8%  
Other income 1,787 3,014 68.7%
Depreciation 1,754 1,705 -2.8%
Interest 667 815 22.1%
Profit before tax 8,029 5,126 -36.2%
Tax 1,589 878 -44.7%
Profit after tax/(loss) 6,440 4,248 -34.0%
Net profit margin (%) 10.7% 7.0%  
No. of shares (m)   1,914  
Diluted earnings per share (Rs)*   10.5  
P/E ratio (x)*   10.5  
*trailing twelve month earnings

What has driven performance in 1QFY13?
  • During the quarter ended June 2012, the company's net sales remained flat. Standalone revenues came in at Rs 60.3 bn (-0% YoY, -21% QoQ) as copper volumes declined to 69 kt on account of the planned shutdown undertaken in 1QFY13 and aluminium volumes declined to 132 kt on operational disturbances in aluminium smelters. Aluminium realizations were down by 8% QoQ on account of a fall in LME price.

  • Operating profits and operating margins declined by 46.5% YoY and 6% YoY during the quarter. This was due to high input cost (coal, caustic soda and carbon products) and unavailability of high quality bauxite. Among the cost elements, other expenses as a percentage to sales saw a jump of 440 bps QoQ to 10%, power and fuel costs to sales rose 283 bps QoQ to 12.6% and employee costs to sales increased to 4.8%, up 131 bps QoQ. Rise in these costs offset some improvement in the raw material costs to sales that fell by 600 bps QoQ to 60.5%.

    Cost break-up
    (Rs m) 1QFY12 1QFY13 Change
    Raw Materials 38252 38947 1.8%
    % of sales 63.4% 64.6%  
    Staff costs 2501 2902 16.0%
    % of sales 4.1% 4.8%  
    Power & fuel 6353 7573 19.2%
    % of sales 10.5% 12.6%  
    Other Expenditure 4536 6222 37.2%
    % of sales 7.5% 10.3%  
    Purchase of traded goods 5 4 -24.0%
    % of sales 0.0% 0.0%  
    Total operating cost 51646 55648 7.7%
    % of sales 85.6% 92.3%  

  • Net profit declined by 34% YoY during the quarter. Net margins declined by 3.7% YoY. However the decline in net profit was negated to some extent by higher other income. During the quarter the company received dividends of Rs 450 m and Rs 850 m from subsidiaries ABML and Dahej Harbour and Infrastructure Limited respectively.

  • Copper cathode production de-grew by 5.7% YoY to 69 kt due to planned maintenance shutdown. However copper rods production improved by 6.8% YoY to 36 kt. Copper segment revenue for 1QFY13 remained flat to Rs 39.7 bn as drop in volume is being somewhat mitigated by higher realization. Copper segment EBIT for 1QFY13 de-grew by 47.8% YoY due to lower production and drop in TcRc. EBIT margin for the same period dipped to 1.9%, lowest in past 30 quarters.

  • In Aluminum segment, production of alumina remained flat on YoY basis to 335 kt while aluminum production dipped by 6% YoY to 132 kt due to production disruption. Aluminum segment revenue for 1QFY13 de-grew by 1.5% largely due to lower volume and stable realization. Aluminum segment EBIT for 1QFY13 de-grew by 54.9% due to lower availability of high quality bauxite and higher coal cost.

What to expect?
Hindalco has been marred with capex delays from past 18 months. The company has deferred the commissioning dates for almost all its upcoming facilities. We believe that delays in getting mining approvals has been the prime reason for these delays as many projects will be unviable without the associated mines. The Empowered Group of Ministers recommended forest clearance to the Mahan Coal Block in May 2012 (this is Stage I). The company is awaiting a notification from the Ministry of Environment and Forests (MOEF) before applying for Stage II clearance.

At the current price of Rs 110, the stock trades at a P/BV multiple of 1.6x our estimated FY15 book value per share. However, delays in expansion projects and cost overrun may hurt company. We continue to remain positive on the stock as most of the negative seems to be priced in.

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