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Hindalco: Aluminium acts saviour

Oct 29, 2004

Performance summary
Domestic aluminium major, Hindalco, has declared its 2QFY05 results. The company derives its revenues from two segments viz. aluminium and copper. Akin to the past quarters, while its aluminium division continues to perform well, the copper business remains a drag. Overall, despite the strong topline growth of about 39% during the September quarter, the bottomline of the company has registered a growth of only 10%, as the company has faced pressure at the operating level.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net Sales 14,748 20,460 38.7% 26,346 37,193 41.2%
Expenditure 11,078 16,051 44.9% 19,355 29,054 50.1%
Operating Profit (EBDITA) 3,670 4,409 20.1% 6,991 8,139 16.4%
EBITDA margin (%) 24.9% 21.5%   26.5% 21.9%  
Other income 879 1,032 17.4% 1,589 1,491 -6.2%
Interest 422 398 -5.7% 873 796 -8.8%
Depreciation 778 893 14.8% 1,495 1,759 17.7%
Profit before tax 3,349 4,150 23.9% 6,212 7,075 13.9%
Tax 1,072 1,647 53.6% 2,005 2,619 30.6%
Profit after Tax/(Loss) 2,277 2,503 9.9% 4,207 4,456 5.9%
Net profit margin (%) 15.4% 12.2%   16.0% 12.0%  
No. of Shares (m) 92.5 92.5   92.5 92.5  
Diluted earnings per share*   108.2     96.3  
Price to earnings ratio (x)   10.9     12.3  
(* annualised)            

The non-ferrous metals power house
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 also has copper as its business segment, which it acquired from Indo Gulf.

What has driven performance in 2QFY05?
Strong volumes and realisations help topline growth:  Hindalco has declared a 39% growth in topline for the September 2004 quarter as compared to the same quarter last year. Increase in volume sales of both its segments – aluminium and copper coupled with the continued strong realisations has helped the company notch the smart topline growth.

It must be noted that average aluminium prices were higher by 19% YoY during the quarter under consideration. This, along with higher concentration on the domestic market and thrust on value-added products have aided the company’s improvement in operating margins for its aluminium business by 350 basis points. It has to be noted that domestic prices are higher as compared to landed cost of imported aluminium resulting in realization benefits.

In the case of copper, average copper prices were higher by 63% during the quarter as compared to the corresponding quarter last year. While the details of volume sales are not available as yet, the 48% growth in copper business topline is seemingly a factor of both, higher volume sales and higher copper prices. However, a steep duty reduction of 10%, higher coal prices and depressed TC/RC margins continue to bog down the performance of the copper business. It must be noted here that the operating margins of this business have been hit by 890 basis points.

(% of net sales) 2QFY04 2QFY05
Stock in trade -5.1% -3.2%
Raw material 54.0% 58.7%
Staff Costs 4.0% 3.1%
Mfg Exp 17.2% 15.8%
Other Exp 5.0% 4.0%
Total Expenditure 75.1% 78.5%
Copper continues to disappoint:  While the aluminium business segment continues to deliver strong performance, it is the copper business that has led to the suppression of overall operating performance of the company. The operating margins have declined by 330 basis points during the quarter over the same quarter last fiscal. It must be noted that barring the deterioration of the ‘raw materials as a percentage of net sales’ parameter, the company has improved efficiencies on all other parameters (see table).

Net profit growth remains muted:  The poor performance of the copper business, which has affected the operating level performance of the company, restricted the net profit growth of the company to 10%. The bottomline of the company has been adversely affected further by the high tax provisioning (up 54% YoY) as it includes deferred tax liabilities pertaining to earlier years.

What to expect?
At Rs 1,185, the stock trades at a P/E multiple of 12.3x annualised 1HFY05 earnings. While the Chinese factor has played havoc a couple of times amongst commodity stocks in the recent past, the outlook for the company (both for aluminium and copper) looks promising over the medium-term on the back of firmness in commodity prices and a fundamentally strong domestic market.

Impressive growth in power, transport and construction sectors bode well for the company. Moreover, with increased metal production capacities in both aluminium and copper, the company seems well placed to take advantage of the growth in these sectors. Further, while concentration on high value-added products segments would help Hindalco maintain its aluminium segment margins, reactivation of mines and prospects of higher production at other copper mines would help improve the TC/RC of its copper business. It must be noted that spot TC/RC margins have already firmed up in recent times, which would have a favourable impact on copper margins for the company. Though the current valuation is on the higher side of the spectrum, it must be remembered that the effect of capacity expansions and acquisitions will be reflected in the following quarters.

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