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Hindalco: Expansion acts buffer

Oct 23, 2003

Hindalco, the A.V.Birla group company, announced its 2QFY03 numbers today. The company is the largest producer of primary aluminium in the country and is also one of the lowest cost producers of the base metal in the world. For the quarter ended September 2003, the company has reported an 18% bottomline growth on the back of 22% topline growth. It must be noted here that the figures for the quarter ended September 2002 and for the half-year (1HFY03) have been adjusted accordingly to include Indo Gulf’s acquired Copper division performance.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net Sales 12,059 14,748 22.3% 24,038 26,303 9.4%
Other Income 594 879 48.0% 1,035 1,678 62.1%
Expenditure 8,886 11,078 24.7% 17,392 19,401 11.6%
Operating Profit (EBDIT) 3,173 3,670 15.7% 6,646 6,902 3.9%
Operating Profit Margin (%) 26.3% 24.9%   27.6% 26.2%  
Interest 306 422 37.9% 657 873 32.9%
Depreciation 623 778 24.9% 1,256 1,495 19.0%
Profit before Tax 2,838 3,349 18.0% 5,768 6,212 7.7%
Tax 905 1,072 18.5% 1,867 2,005 7.4%
Profit after Tax/(Loss) 1,933 2,277 17.8% 3,901 4,207 7.8%
Net profit margin (%) 16.0% 15.4%   16.2% 16.0%  
No. of Shares 92.5 92.5   92.5 92.5  
Diluted Earnings per share*   98.5     91.0  
P/E Ratio         11.2  

The company’s topline growth is primarily a factor of increased volume sales of aluminium (up 22%) as the realisations improved very marginally (0.5%). Moreover, the growth in volume sales came mainly from the domestic market wherein sales increased by over 25% compared to a mere 4% export growth. The contribution from the value added products like foils, extrusions and rolled products was also in the negative. It must be noted that during 2QFY04, while the average aluminium prices on the LME were higher by 10% over that of the corresponding quarter last year, the appreciation in the rupee and the domestic competition seems to have put pressure on the pricing ability of the company. The scenario for copper was relatively favourable. While the company’s volume sales increased by 23% (over 50% growth in exports), the net realisations also showed a 9% rise on the back of an improved average LME copper realisation of 15% YoY.

The other income for the quarter ended September 2003 was also higher by 48% and the company has attributed this to higher treasury investments in mutual funds, long-term gains and dividends, forex rate gain on working capital loans, profit of Rs 205 m on the sale Indo Gulf shares and interest of Rs 48 m on account of Income Tax refunds.

The operating margins of the company took a hit of 140 basis points on account of higher cost of some inputs like caustic soda, CP Coke and bauxite. This is also evident from the fact that the raw material costs as a percentage of net sales increased from 47% in 2QFY03 to 54% in 2QFY04. This increase in costs was the primary cause of increase in expenditure as a percentage of net sales as all other costs like staff costs and manufacturing expenses have actually reduced. The interest for 2QFY04 was higher owing to lower interest capitalisation to the tune of Rs 121 m. The higher depreciation charges (up 25%) could be attributed to the capacity expansion of the company.

At Rs 1,020, the Hindalco stock trades at annualised P/E multiple of over 11x 1HFY04 earnings. The company has been on an expansion spree in all its business segments i.e. alumina, aluminium and copper. It has also been expanding by acquiring other capacities, like in the case of Copper, wherein after acquiring the Nifty Mines, the company has gone ahead and acquired Mount Gordon Copper Mine through investment in Birla Mineral Resources Pvt. Ltd., its wholly owned subsidiary.

Thus going forward, as the global economies, especially the US, gets back onto the recovery path, the company is in a comfortable position to capitalise on any increase in consumption. Moreover, with Asian economies, especially China, displaying strong aluminium and copper consumption trends, the prices of the metals are unlikely to weaken much going forward. While the valuation is on the higher side of the spectrum at the current juncture, the stock seems fairly priced. However, at the same time, it must be remembered that the effect of the capacity expansions and acquisitions will be reflected in the following quarters.

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