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Hindalco: Interest costs dent profits - Views on News from Equitymaster

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Hindalco: Interest costs dent profits
Sep 1, 2014

Hindalco has announced its standalone financial results for the quarter ended June 2014. Net sales for the company increased by 37% YoY while net profits decreased by 30.9% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 37% YoY on the back of higher volumes in both aluminum and copper businesses.
  • Operating profits of the company increased by 56.4% YoY due to higher volumes and realizations.
  • Net profit declined by 30.9% YoY due to high interest cost. The interest cost rose 127% YoY as interest on loans taken for projects was expensed during the quarter. Other income fell 49.5% YoY. During 1QFY14, other income was substantially higher as it included dividend from subsidiaries and certain exceptional gains.
  • Net profits declined by 30.9% YoY during the quarter.

Consolidated financial snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 58,379 79,961 37.0%
Expenditure 53,595 72,477 35.2%
Operating profit (EBDITA) 4,785 7,484 56.4%
EBDITA margin (%) 8.2% 9.4%  
Other income 4,279 2,163 -49.5%
Interest (net) 1,487 3,376 127.0%
Depreciation 1,831 1,871 2.2%
Profit before tax 5,746 4,401 -23.4%
Tax 1,005 1,126 12.0%
Profit after tax/(loss) 4,741 3,275 -30.9%
Net profit margin (%) 8.1% 4.1%  
No. of shares (m)   2,064.5  
Diluted earnings per share (Rs)   1.59  
Price to earnings ratio (x)*   28  
(*on trailing twelve months earnings)

What has driven performance in 1QFY15?
  • During the quarter ended June 2014, Hindalco's topline increased by 37% YoY mainly on account of higher volumes. Aluminum volumes were higher due to ramp up in production at Mahan smelter. Copper volumes were higher due to base effect. In 1QFY14, copper volumes were impacted by a shutdown at Dahej smelter.

  • The alumina production (excluding Utkal) was at 290 KT during the quarter compared to 348 KT in 1QFY14. Production was lower due to non-availability of bauxite. Utkal production stood at 199 KT in 1QFY15 while the overall metal production rose to 190 KT amidst ramp up at the Mahan smelter.

  • In the copper segment, copper cathode production increased by 41% YoY to 96 KT while DAP production declined by 36% YoY to 36 KT during FY14. The copper segment's net sales increased by 37% YoY to Rs 49.9 bn.

  • Aluminum business' EBIT rose to Rs 3.2 bn from Rs 2.49 bn in 1QFY14. Copper business' EBIT rose sharply from Rs 810 m to Rs 3.17 bn in 1QFY15. It may be noted that the performance of the copper segment was impacted by smelter shutdown in 1QFY14.

  • During the quarter, smelting operations at Aditya Aluminum and Hirakud were impacted due to power outage and torrential rains.
What to expect?
At the current price of Rs 172, the stock trades at 28 times its TTM earnings. During the current quarter, sales growth jumped substantially due to higher volumes driven by a ramp up in production at Mahan smelter. While the Aluminum LME price was lower by 2% YoY, a weaker rupee and higher metal premium cushioned sales. However, profits were impacted by higher interest costs and lower other income on the expected lines. Although Hindalco has expanded its aluminum capacity recently, volatile aluminum prices, sticky costs and delay in commencement of mining from captive blocks may put pressure on its profitability growth. Nonetheless, with greenfield capacities ramping up and performance from copper business expected to remain robust, volumes may remain strong.

Taking into considerations these factors we maintain our HOLD view on the stock.

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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