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Hindalco: Hurt by subdued LME prices - Views on News from Equitymaster

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Hindalco: Hurt by subdued LME prices

Nov 3, 2009

Performance summary
  • The standalone topline declines by 16.1% YoY mainly on account of subdued aluminium and copper LME prices.
  • Operating profits decline by 38.7% YoY, leading to a fall in operating margins by 5.1% during the quarter.
  • Bottomline suffers a decline of 52.2% YoY mainly on account of lower operating profits coupled with significant fall in other income and higher depreciation.
  • Half yearly bottomline declines by 41.8% YoY on the back of 14.7% decline in the topline.

Standalone results
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 56,832 49,171 -13.5% 103,307 88,166 -14.7%
Expenditure 46,897 43,080 -8.1% 83,883 74,496 -11.2%
Operating profit (EBDITA) 9,935 6,092 -38.7% 19,424 13,670 -29.6%
EBDITA margin (%) 17.5% 12.4%   18.8% 15.5%  
Other income 1,768 573 -67.6% 3,914 1,326 -66.1%
Interest (net) 855 663 -22.5% 1,616 1,345 -16.8%
Depreciation 1,592 1,659 4.2% 3,160 3,312 4.8%
Profit before tax 9,256 4,343 -53.1% 18,563 10,339 -44.3%
Extraordinary income/(expense)            
Tax 2,056 903 -56.1% 4,396 2,093 -52.4%
Profit after tax/(loss) 7,200 3,441 -52.2% 14,167 8,246 -41.8%
Net profit margin (%) 12.7% 7.0%   13.7% 9.4%  
No. of shares (m)       1,227.1 1,700.5  
Diluted earnings per share (Rs)*         9.6  
Price to earnings ratio (x)*         12.7  

What has driven performance in 2QFY10?
    Let us have a look as to how the two main segments of the company viz. Aluminium and Copper performed during the quarter:

  • Aluminium: On a standalone basis, the segment accounted for 34% of the company’s total revenues during 2QFY10 as compared to 37% in the previous fiscal. Segmental revenues declined by 22.2% YoY during the quarter. This was mainly on account of lower realisations that can be attributed to a 35% fall in LME prices over 2QFY09 levels. However, weaker rupee, higher volumes and improved product and geographic mix impacted positively. In fact, overall volumes sales in the segment grew by 15% YoY. PBIT of the segment was lower by 63.8% YoY, with margins falling by 18% as increase in cost of coal hurt the margins of the segment.

  • Copper: The copper segment’s revenues declined by 8.3% YoY, mainly on account of lower LME prices. However, the segment registered increase in its proportion to the company’s total revenues from 63% in 2QFY09 to 66% in 2QFY10. Total volumes sales in the segment grew by 13% YoY. PBIT of the segment grew by around 57.3% YoY, with margins improving by 2.8% despite the lower by product credit and lower TcRc charges during the quarter.

  • As far as the operating performance is concerned, lower than proportionate decline in the operating expenses as compared to topline resulted in EBITDA margin decline of 5.1% to 12.4% during the quarter. It may be noted that the figures pertaining to raw material costs and other expenditures are not strictly comparable as the company adopted AS 30 principle for all derivatives during the quarter.

    Cost break-up…
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 35,168 31,980 -9.1% 61,879 57,099 -7.7%
    % sales 61.9% 65.0%   59.9% 64.8%  
    Staff cost 2,067 2,282 10.4% 3,928 4,352 10.8%
    % sales 3.6% 4.6%   3.8% 4.9%  
    Power and fuel 5,262 5,223 -0.7% 10,028 9,433 -5.9%
    % sales 9.3% 10.6%   9.7% 10.7%  
    Other expenditure 4,401 3,595 -18.3% 8,048 3,612 -55.1%
    % sales 7.7% 7.3%   7.8% 4.1%  

  • The bottomline declined by 41.8% YoY mainly on account of lower operating profits as well as subdued other income. Moreover, the increase in depreciation charges impacted the bottomline further. However, lower interest charges and tax out go had a favorable impact on the bottomline.

What to expect?
At current price of Rs 122, the stock is trading at a multiple of 0.7 times our expected FY12 book value per share. While the topline growth of the came in line with our estimates, the bottomline has been lower than our estimates. However we believe that it will not significantly affect our medium term price target as we use asset based valuation method to value the company. We continue to remain positive on the company.

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