Oct 29, 2002|
Indal: Back on track
Indian Aluminium Company Ltd., part of the A.V. Birla Group, has managed to report a considerably better performance as compared to the preceding quarter. Despite FY02 being a challenging year, the YoY pressure continues. We had mentioned in our 1QFY03 report that QoQ performance was likely to improve, as smelter operations at Hirakud, Orissa were disrupted by seasonal storm in May '02.
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The smelter resumed operations in June '02 but gradual normalisation of production is likely to have impacted metal output. Growth in sales is largely driven by alumina chemicals while foil & extrusion divisions have salvaged aluminium sales. Overall growth has been achieved through higher volumes, which is corroborated by lower inventory and persistent weakness in aluminium prices. Lower inventory is largely driven by higher alumina exports.
Revenues of the company are driven primarily by alumina and fabricated metals. Alumina prices are ruling low with weak demand for the base metal. In FY02, alumina prices declined by approximately 40% YoY. Also, as mentioned earlier, persistent weakness in metal prices are percolating to downstream products. As a result, operating margins have come under pressure. Besides, company is likely to have incurred expenses to stabilise operations at Hirakud. De-stocking of alumina could also have contributed to pressure on margins. Some respite in alumina operations is likely to have come from lower YoY caustic soda prices.
Other income registered a dramatic jump in 1QFY03, as the company sold some real estate. Also, interest on delayed income tax refunds has contributed to the rise. Interest expense continues to decline with re-financing of high cost debt. Also, a shift towards floating rate has helped the company benefit from softer international & domestic interest rates.
With an estimated 66% of revenues generated from downstream products, the company tends to exhibit considerable resilience vis-à-vis the commodity cycle. In FY02, the company reported highest growth in turnover compared to the peer group. Going forward, the company is likely to benefit increasingly from association with Hindalco. Indal is addressing smelting capacity constraints. Commercial production from enhanced capacity at Hirakud is likely to start by end of FY03. Captive power at Hirakud is also being augmented to support the higher aluminium production. The merger with Annapurna Foils Ltd. (AFL) has resulted in an additional 4,000 MTPA of foil capacity.
At Rs 119 the scrip is trading on a multiple of 7.6x 1HFY03 annualised earnings. The scrip generally trades in a band of 4x-6x. The higher valuation is due to an open offer by Hindalco for acquiring the outstanding non-promoter shareholding at Rs 120/ share. Post open offer, in case promoter shareholding exceeds 90%, the management plans to de-list Indal and operate it as a 100% subsidiary. The open offer closes on November 12, 2002.
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