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Hindalco’s latest annual report: A peek. - Views on News from Equitymaster

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Hindalco’s latest annual report: A peek.

Sep 2, 2008

Hindalco, world’s largest aluminium rolling mill and Asia's top aluminium producer recently came out with its FY08 annual report. In this article, let us go through some of the important information therein. Chairman’s message: India’s GDP continued to grow at a rate of 8% plus since 2003-04 and would continue this momentum in coming years ahead. In FY08, there had been pressure on the growth due to high inflation, rising crude prices and high interest rates, Moreover sub prime crisis caused volatility in the global financial markets. Despite all these adverse factors, the business continued to grow, holding the fact that fundamentals of the economy are strong.

With the acquisition of Novelis, the company has become world’s largest rolling company. It is now a global player with strong presence in five continets and is among the top seven global players. The product portfolio acts as a natural hedge against the volatility of the LME (London Metal Exchange).

The company continued its strong emphasis on operational efficiency, capacity expansions in fast growing markets of Asia and South America and reduction in corporate costs. Also Novelis’ exposure to contracts with metal price ceiling had been scaled down.

The company plans for a multi location expansion programmes and would invest around US$ 8.5 bn (approx Rs 374 bn) by 2011. It also plans to expand the domestic capacity to the tune of 50% of combined capacity of Hindalco and Novelis currently.

Management Discussion & Analysis: The company has mainly two business segments viz aluminium and copper. The performance of aluminium business segment of Hindalco (standalone) was impacted by all macroeconomic parameters that turned adverse like the rupee appreciation, import duty cut and unrelenting cost-push. Thus causing margins to squeeze at both ends. However the average LME prices remained strong but could not help the company to increase the domestic realisation due to fall in import duty and rupee appreciation that caused 11% drop in average rupee realisation per tonne of the primary metal as compared to FY07.

The copper segment significantly improved its operating performance despite the sharply escalating input costs. However, stronger rupee and lower import duty differential adversely impacted top as well as the bottom line of the segment. The copper LME was significantly higher than FY07, which led to a jump in sales but with a little impact on profits as LME is pass through for copper business. Furthermore higher LME leads to higher working capital requirement in the copper segment. But despite all these adversities copper segment maintained its margins.

Outlook: In 2008, the global aluminium demand is expected to remain strong. The Chinese demand is also expected to remain firm. In India, the demand is expected to be in line with the economic growth rate. The demand in USA would continue to remain weak on account of slow down. The production is also expected to remain in line with the growing demand and new capacities coming up in Middle East and Asia. However, the industry would continue to face the cost-push on account of higher crude prices, input costs and freight costs. The company has adopted a consistent strategy to achieve global size and scale with Novelis in its fold and also through brownfield and greenfiled expansion plans in upstream aluminum business, thus improving the cost competitiveness and establishing itself as low cost global alumina and aluminium producer.

The demand for copper is expected to remain strong on account of growing consumption from China. The demand from US would continue to remain weak but this would be offset by the strong demand from the emerging economies like the BRIC countries. The copper consumption in India would continue to grow in line with the economic growth. Industrial growth, housing, infrastructure and power sectors are expected to drive the demand over medium term.

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