With a weakening global economy the aluminium industry was already in the midst of a downturn prior to the September 11 incidents. The terrorist attacks only aggravated the pessimistic outlook towards the sector. Prior to the September events, aluminium prices on the London Metal Exchange (LME) were lower by 7.8% since start of the fiscal.
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The company has managed to improve performance as compared to the first quarter of the current fiscal. Net sales are higher, although marginally, as compared to a YoY decline in 1QFY02. Hindalco has managed to post higher sales by focusing on high value added, downstream products. With the reported decline in sale volumes the rise in turnover is even more commendable considering the weakness in aluminium prices. Sale of products was lower by 2.1% YoY.
Higher realisations and to that extent lower sensitivity to aluminium commodity prices seems to be the upshot from presence in downstream businesses of rolled & extrusion products, redraw rods, foils and aluminium alloy wheels. The focus on improved product mix has also led to higher export realisations. Sharp rupee depreciation during the quarter is likely to have helped the cause.
Lower sale volumes and higher production across the board, except for extrusions, has led to a build up in 2QFY02 inventory. Despite the improved realisations, the company could not protect its operating margins, as expenses rose at a faster clip. Consequently, OPM is lower by 260 and 220 basis points for the quarter and half-year ended September '01 respectively. Raw material and manufacturing costs, which are the largest components of operating expenses, have been the key reason behind higher costs. That said, the company is fighting higher expenses through improved operating efficiencies. Initiatives on this front include Project Rocket 2K: Profit Improvement Exercise, which is expected to yield savings of Rs 400 m by FY04.
Interest expense continues to decline, as the company financed high cost debt with low cost borrowings. The sharp decline, however, seems to suggest the re-payment of loans. Other income has increased on the back of dividend from Indal. The company has provided for deferred tax liability and corresponding alterations have been made in the previous year to make comparison meaningful. Deferred tax upto March '01 will be provided for at the end of the current fiscal.
At Rs 542 the Hindalco scrip is trading on a multiple of 6.1x 1HFY02 annualised earnings. Valuations have decreased since start of the fiscal, reflecting fundamentals, at which time the scrip was trading on a multiple of 9.1x FY01 earnings.
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