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Hindalco: All round performance - Views on News from Equitymaster

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Hindalco: All round performance
Oct 19, 2006

Performance summary
The flagship company of the Aditya Birla Group, Hindalco, announced splendid results for the quarter ending September 2006. The company has benefited from higher volume sales as well as realisations, with the commodity cycle strengthening further during the quarter. The company has reported a 74% surge in net sales and 89% YoY increase in operating profit.

(Rs m) 2QFY05 2QFY07 Change 1HFY06 1HFY07 Change
Net Sales 26,608 46,342 74.2% 48,686 89,079 83.0%
Expenditure 21,729 36,478 67.9% 37,763 69,881 85.1%
Operating Profit (EBDITA) 4,879 9,864 102.2% 10,923 19,198 75.8%
EBITDA margin (%) 18.3% 21.3% - 22.4% 21.6% -
Other income 927 1,108 19.5% 1,263 1,884 49.2%
Interest 539 515 -4.5% 1,000 1,149 14.9%
Depreciation 1,285 2,080 61.9% 2,454 3,421 39.4%
Profit before tax 3,982 8,377 110.4% 8,732 16,512 89.1%
Tax 1,217 2,401 97.3% 2,718 4,521 66.3%
Profit after Tax before extraordinary items 2,765 5,976 116.1% 6,014 11,991 99.4%
Extraordinary items - - - - - -
Profit after Tax 2,765 5,976 116.1% 6,014 11,991 99.4%
Net profit margin (%) 10.4% 12.9%   12.4% 13.5%  
No. of Shares (m) 928.0 986.0   928.0 986.0  
Diluted earnings per share         21.7  
Price to earnings ratio (x)         8.7  

What is the company’s business?
Hindalco, an AV Birla Group company, is India’s largest aluminium producer and has the distinction of being one of the lowest cost producers of the metal in the world. It is an integrated player, having captive bauxite mines, power units and high value-added output comprising semi-fabricated aluminium products. The company has a significant market share in all the segments in which it operates. It enjoys a domestic market share of 42% in primary aluminium. The company also has a significant presence in the copper segment, which contributed 53% of the company’s revenues in FY06.

What has driven performance in 2QFY07?
Improved product mix and high market share: Driven by strong aluminium prices, the topline increased by 31% YoY. Aluminium business continued to operate at full capacity utilization (alumina and primary aluminium production reached at 100% and 103% respectively). Of the total output, value-added products (VAP) that have higher margins contributed to the extent of 57% in this quarter. The copper business has also done well on the back of the rising prices. Revenues from copper business have gone up by 13%, buoyed by high copper prices. Revenues from the copper business increased by 123%. The growth was sustained by the progressive ramp up of one of the copper smelters.

Segmental snapshot…
  Copper Aluminium
(Rs m) 2QFY06 2QFY07 Change 2QFY06 2QFY07 Change
Revenues 12,464 27,825 123% 14,126 18,520 31%
PBIT (692) 1,233 -278% 4,345 6,710 54%
PBIT margin (%) -5.6% 4.4% - 30.8% 36.2% -

Operating margins sustained: Operating profit grew by 89% YoY. This is despite higher raw material costs like those of coal, caustic soda and furnace oil putting pressure on the profitability of the aluminium business. Copper business, which posted a PBIT loss of Rs 692 m in 2QFY06, has reported a profit of Rs 1.2 m during 2QFY07 due to improved Tc/Rc (treatment and refining charges) from its copper concentrate business. A combination of the copper division returning to profitability and the aluminium margins expanding by 560 basis points (5.6%) has helped the company post higher operating profits during the quarter.

Despite a 40% jump in depreciation charges (owing to the capacity expansion plans), PBT grew at a faster clip as compared to EBDITA as a result of higher other income. Depreciation charges in 2QFY07 also include impairment loss recognized in respect of smelter-2 of the copper unit at Dahej, Gujarat.

What to expect?
We remain positive on the prospects of the company, as the outlook for both its businesses remain promising in the medium-term. The company is witnessing increasing contribution from value-added products, which not only have better margins but the volatility in realisations is also low. The company is planned a brownfield expansion at Muri and Hirakud and a green-field plant Utkal for its aluminium division. It is also awaiting coalmines allocation by Jharkhand government, which will help to further reduce power costs.

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