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Indal: Lackluster performance - Views on News from Equitymaster

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Indal: Lackluster performance

Oct 27, 2003

Indian Aluminium (Indal), the 96% subsidiary of the A.V.Birla Group company, Hindalco, posted a 6% topline growth for the quarter ended September 2003 (2QFY04). Moreover, in line with the sluggish topline growth, the bottomline also lagged, which remained almost flat. However, for the first half of the current fiscal, the companyís bottomline registered a meager growth of 2% on a topline growth of 13%. The relatively better half-yearly performance of the company was on account of the strong topline growth during 1QFY04.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Sales 3,695 3,900 5.6% 6,798 7,710 13.4%
Other Income 87 79 -9.7% 197 135 -31.5%
Expenditure 3,162 3,310 4.7% 5,861 6,561 11.9%
Operating Profit (EBDIT) 533 591 10.9% 937 1,149 22.6%
Operating Profit Margin (%) 14.4% 15.1% 13.8% 14.9%
Interest 64 48 -25.1% 125 101 -19.1%
Depreciation 171 178 4.4% 336 365 8.6%
Profit before Tax 385 443 15.0% 672 818 21.6%
Extraordinary items (4) - (10) -
Tax 66 130 97.0% 107 250 133.6%
Profit after Tax/(Loss) 315 313 -0.6% 555 568 2.3%
Net profit margin (%) 8.5% 8.0% 8.2% 7.4%
No. of Shares 71.3 71.3 71.3 71.3
Earnings per share 17.6 15.9
P/E Ratio 9.4

Considering the second quarter performance of the company, the topline growth of 6% was largely contributed by the growth in the aluminium segment of the company, which grew by 11%. This is in sharp contrast to the chemicals segment (alumina hydrate and specialty alumina chemicals) of the company, which registered a de-growth of 2%. The growth in the aluminium segment could be attributed to the capacity addition to its smelter capacity at Hirakud, the capacity of which stands expanded at 57,200 TPA and which is being further expanded to 65,000 TPA. It must also be noted that in order to complement the expanded smelter capacity, the company is expanding its power generating capacity from 67.5 MW to 167.5 MW at Hirakud and also developing a coalmine for captive use.

Indalís operating margins showed a 70 basis points improvement during 2QFY04, as compared to the corresponding quarter last year. This improvement in operating margins could largely be attributed to the reduction in raw material costs, which fell from 33% of net sales in 2QFY03 to 29% at present. This helped to keep the overall expenditure under control despite the power and fuel costs expanding from 22% to 25%. It must be noted here that during 1QFY04 also, the power costs had gone up for the company. The rise in power costs was due to a further hike in power tariffs by the Kerala State Electricity Board (KSEB) by 0.5 paise per unit, which rendered the companyís smelter operations at Alupuram, Kerala unviable. This forced Indal to de-energise the smelter operations from August 2003.

While the topline of the company improved due to better topline performance of the aluminium segment, the bottomline saviour (it could have been worse) was the better realisations of the chemicals segment. Just to put things in perspective, at the PBIT levels, the profits of the chemicals segment spurted by 37% compared to just 4% of the aluminium segment. The scenario is similar for the first half performance of the company wherein the chemical segmentís PBIT performance improved by 44% while the corresponding figure for aluminium was 23%. The superior performance of the chemicals segment can be attributed to the huge improvement in alumina prices in 2003 wherein the spot alumina prices have virtually doubled as compared to the same quarter last year. However, it must be noted that the effect on realisations is not on a similar scale owing to the fact that much of the sales are contract sales, wherein prices are fixed for a particular period, while a lesser portion is sold in the spot markets. This huge spurt in alumina prices is due to increased consumption from China.

At Rs 150, the stock is trading at over 9x its annualised 1HFY04 earnings, which is at the higher end of its valuation spectrum. Going forward, the effect of a further expansion of aluminium capacity and lower power costs on account of increased captive power generation would be reflected in the performance of the company. With improved possibilities of a recovery in the US and other developed markets, the demand for aluminium is set to improve. On the domestic front also, GDP growth of over 6% augurs well for aluminium demand, which is driven by major end-user segments like auto, transportation, construction and packaging. However, apart from the current valuation concern, it must be noted that the current ruling prices of alumina (approx. US$ 280-300 per tonne) and of aluminium (approx. US$ 1,480 per tonne) are not sustainable and consolidation at lower levels is a high possibility.

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