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Hindalco: Under pressure

Oct 23, 2002

Increasing competition in domestic markets and softer international aluminium prices has affected financial performance of Hindalco Industries Ltd. (HIL). Turnover growth rate has been declining since start of 2002. Despite a challenging operating environment in FY02, the company had managed to salvage operating performance. However, business has come under considerable pressure in 2QFY03.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Net Sales 5,573 5,697 2.2% 11,063 11,557 4.5%
Other Income 438 502 14.6% 764 817 6.9%
Expenditure 3,039 3,897 28.2% 6,009 7,488 24.6%
Operating Profit (EBDIT) 2,534 1,800 -29.0% 5,054 4,069 -19.5%
Operating Profit Margin (%)45.5%31.6%45.7%35.2%
Interest 102 53 -48.0% 206 132 -35.9%
Depreciation 375 413 10.1% 744 826 11.0%
Profit before Tax2,4951,836-26.4%4,8683,928-19.3%
Tax 824 585 -29.0% 1,585 1,275 -19.6%
Profit after Tax/(Loss) 1,671 1,251 -25.1% 3,283 2,653 -19.2%
Net profit margin (%)30.0%22.0%29.7%23.0%
No. of Shares 74.5 73.7 74.5 73.7
Diluted Earnings per share*90.767.989.172.0
P/E Ratio 6.8
(annualised)

Having said that, production has increased across the board indicating revenues have been lifted by volumes. At the same time highlighting the pressure on realisations. Sale volumes for the quarter were higher by 6% YoY. The company commissioned the 9th potline of 33,000 MT in FY02, which has led to higher production during the concerned period. Slowdown in the global economy in second quarter of 2002 and meltdown of equity markets has affected international commodity prices. Although aluminium prices were weakening in the corresponding period last year, London Metal Exchange (LME) spot prices were lower by 5% in 2QFY03. In Budget '03, import tariff on the base metal was reduced to 15% from 25%, accentuating weakness in domestic market prices. Also, considering the rising exchange rate, rupee depreciation is unlikely to have provided the normal buffer.

While production has increased by single digits, operating costs have risen considerably during the concerned period. We indicated in our earlier report that rise in coal prices at start of FY02 has led to higher energy costs. More importantly, natural calamity at the coal mine has disrupted quantity & quality of coal supply. Further, torrential rain resulting in flooding disrupted power plant operations, which affected aluminium production (estimated loss of 6,000 MT). Costs incurred to re-stabilise operations has added downward pressure to operating profits. The company entered into a fresh wage agreement at start of 2002. The agreement is valid upto December '04 and entails an estimated 30% hike leading to the YoY rise in wage costs.

Gross interest expense has increased with company raising borrowings. However, capitalisation of interest on projects under implementation has contributed to the reduction. Also, the company is likely to have benefited from the softer interest rate regime. Depreciation has increased with commissioning of the 9th pot line.

Going forward, we reckon aluminium prices are likely to remain soft at $1,350/ tonne for FY03. Impact on revenues is likely to be cushioned by commissioning of additional capacity. That said, Hindalco is likely to be among the front runners in bidding for National Aluminium Company Ltd. (Nalco). We reckon, the company could require an estimated Rs 75 bn, which could alter the financial risk profile of the company, especially considering a weak cycle and aggressive bidding. On July 21, 2002, the board approved the amalgamation of the copper business of Indo Gulf Corporation Ltd. with itself. The amalgamation is likely for enhancing balance sheet size. Also, the company has declared an open offer for outstanding non-promoter shares in Indal at Rs 120/ share.

At Rs 490 the scrip is trading on a multiple of 6.8x 1HFY03 annualised earnings. We reckon, while the long-term potential of the company remains intact, a weak commodity cycle, lower import duty, rising exchange rate and inorganic growth opportunity could pose a challenge in the near term.

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