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Hindalco's FY09 annual report: A peek - Views on News from Equitymaster
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Hindalco's FY09 annual report: A peek
Aug 25, 2009

Hindalco, India’s leading aluminium producer recently came out with its FY09 annual report. In this article, let us go through some of the important information therein. Chairman’s message: The global economy witnessed an exceptional turmoil in FY09 with what started as a subprime crisis in US later spread across the world resulting into a credit crisis. This made the stock markets all over the world to witness a severe fall followed by a crash in commodity prices. Base metal prices which were trading at their all time highs in the first half of FY09 experienced a decline of more than 50% in the later half.

While the first half of the fiscal experienced a robust demand and high prices for non ferrous metals, the second half witnessed significant demand destruction and in both global as well as domestic markets. US and European markets went into a recession, while growth in emerging markets slowed down significantly.

Hindalco managed to ride out the challenging times by adopting series of measures so as to maintain its growth momentum and profitability. On the domestic front, the company plans to continue with expansion of its greenfield projects viz Utkal Alumina and Aditya Alumninium in Orissa, Mahan Aluminium in MP and Jharkhand Aluminium in Jharkhand. These are expected to go on stream between 2011 and 2013 and would increase the smelting capacity from 0.5 m tonnes to 1.7 m tonnes and refining capacity from 1.7 m tonnes to 6.2 m tonnes.

On the Novelis front, the company was able to maintain a stable liquidity condition despite the gloomy market conditions. The company had taken certain measures like adjusting metal intake, lowering production and decreasing fixed costs in order to improve the operational efficiency. These measures are estimated to result into savings of around US$ 140 m annually.

Management discussion and analysis: The company has mainly two business segments viz aluminium and copper. The performance of aluminium business segment of Hindalco (standalone) was significantly impacted by sharp decline in LME prices and downstream product demand. Average LME prices were lower by 15% YoY basis. However, the depreciation of Rupee by around 14% YoY impacted positively. Thus, the average realization per tonne of primary metal was lower by 9%YoY during the fiscal, despite the slowdown in demand in the domestic markets. Also, higher volumes in primary metals (due to brownfield expansion), improved operational efficiencies, and better working capital management helped the company to partly mitigate the adversities during the fiscal

On the copper division, the segment continued to improve its operating performance despite tight conditions in concentrate market and increasing input costs. The TcRc (treatment charges and refining charges) that declined to all time lows had negatively impacted the segment. Despite the lower volumes, the company managed to increase the realisations by improving product and market mix and higher markups. Also, improved by-product realisation due to higher sulphuric prices and enhanced fertilizers output impacted the segment favourably.

Outlook: In 2009, the global aluminium demand is projected to contract by over 10%. As per CRU the demand is projected to decline by around over 4 m tonnes. This will majorly be on account of significant fall in demand in the US and European markets. Also the demand in China, which has been accounting for almost 1/4th of total aluminum demand is expected to remain stagnant. However, on the domestic front, the demand is projected to grow in line with GDP growth. Also the government’s major thrust on the power sector is likely to drive aluminium demand over a medium term. As far as the aluminium production is concerned, global production is expected to decline in line with the demand. On the prices front, the aluminium prices are expected to remain subdued over a short term with a large inventory overhang. However, the long term fundamentals of the metal continue to remain strong and the demand is expected to rebound by the end of FY10.

The global demand for refined copper is projected to decline by 4% in 2009 mainly on account of subdued consumption in the advanced economies and slow down in the emerging economies. The surplus of the metal is expected to continue over the short run and demand will remain depressed. On the domestic side, the copper consumption is expected to decline marginally as the real estate sector will remain muted for a while. However, long term fundamentals of the metal remain strong as the consumption is expected to increase with renewed focus on power sector and urban housing.

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