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Hindalco: Higher volumes improves profits
Nov 11, 2011

Hindalco Industries Limited has announced its financial results for the quarter ended September 2011. The company has reported an increase of 7% YoY in net sales and an increase of 15.9% YoY in net profits respectively. Here is our analysis of the results

Performance summary
  • Topline grows by 7% YoY during 2QFY12 on back of higher volume and improved realisation.
  • EBITDA margin contracts to 10.7% during 2QFY12 from 11.9% in 2QFY11. The margins were severely impacted by the cost escalations and constrained bauxite and coal availability during the monsoon.
  • Net profits grow by 15.9% YoY during the quarter. Net margins increase by 0.6% YoY.
  • Other income grows by a staggering 114.5%.
  • Net sales and net profit for the half year ended September 2011 increased by 11.5% YoY and 18.4% YoY respectively.

Financial performance
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 58,599 62,719 7.0% 110382 123027 11.5%
Expenditure 51,616 56,026 8.5% 95074 107660 13.2%
Operating profit (EBDITA) 6,983 6,692 -4.2% 15308 15367 0.4%
Operating profit margin (%) 11.9% 10.7%   13.9% 12.5%  
Other income 821 1,761 114.5% 1510 3535 134.1%
Depreciation 1,718 1,741 1.4% 3409 3495 2.5%
Interest 526 675 28.3% 1120 1342 19.9%
Profit before tax 5,560 6,037 8.6% 12290 14066 14.4%
Tax 1,222 1,012 -17.2% 2608 2601 -0.3%
Profit after tax/(loss) 4,338 5,025 15.9% 9682 11465 18.4%
Net profit margin (%) 7.4% 8.0%   8.8% 9.3%  
No. of shares (m)         1,914  
Diluted earnings per share (Rs)*         12.7  
P/E ratio (x)*         10.7  
*trailing twelve month earnings

What has driven performance in 2QFY12?
  • During the quarter ended September 2011, Hindalco's topline grew by 7% YoY. This was driven by higher volumes and improved realization, despite lower sales of value added products. Aluminium revenues increased by 16% YoY on back of higher volumes and better aluminium prices on the LME. Revenues from copper business were marginally higher by 0.03%. This was due to high LME and better by-product credits offset by energy costs and lower copper volumes due to shutdown of one of the smelters at Dahej plant.

  • Operating profits saw a decline of 4.2% YoY due to high power and fuel costs which increased by 31% YoY. This was due to strong inflationary pressures and constrained supply of bauxite and coal during the monsoon. EBITDA margins also saw a decline of 1.2% YoY.

    Cost break-up
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw Materials 36629 38993 6.5% 66852 77244 15.5%
    % of sales 62.5% 62.2%   60.6% 62.8%  
    Staff costs 2843 2915 2.6% 5121 5416 5.8%
    % of sales 4.9% 4.6%   4.6% 4.4%  
    Power & fuel 5742 7528 31.1% 10841 13882 28.0%
    % of sales 9.8% 12.0%   9.8% 11.3%  
    Other Expenditure 4302 4550 5.8% 9169 9073 -1.0%
    % of sales 7.3% 7.3%   8.3% 7.4%  
    Purchase of traded goods 2101 2040 -2.9% 3090 2045 -33.8%
    % of sales 3.6% 3.3%   2.8% 1.7%  
    Total operating cost 51616 56026 8.5% 95074 107660 13.2%
    % of sales 88.1% 89.3%   86.1% 87.5%  

  • The other income increased sharply by 114.5% YoY during the quarter ended September 2011. This was due to an improved treasury yield and an enhanced corpus because of return of capital from Novelis. Other income also includes Rs 600 m dividend that it received from its wholly owned subsidiary, Dahej Harbor and Infrastructure Limited.

  • Net profits registered a rise of 15.9% YoY during the quarter. Net margins increased from 7.4% in 2QFY11 to 8% in 2QFY12.

  • Alumina production was down by 4% this quarter due to constrained supplies and poor quality of bauxite. Unprecedented rains and flood situation in September disrupted coal supplies to the Hirakud captive power plant (CPP), as a result of which there was a temporary slowing down of production in the smelter.

What to expect?
The sovereign debt crisis in Europe may lead to more risk aversion in the financial markets and can have adverse impact on investment flows in commodities sector which has led to higher volatility and lower aluminium and copper prices on the London Metal Exchange (LME). High input costs, lower domestic demand and realisations as well as subdued profitability of the copper business will keep margins under pressure.

Financial closure was achieved for Utkal Alumina and Mahan Aluminium. Financial closure for debt portion of Aditya Aluminium is currently under progress. The company expects to commission its Hirakud smelter expansion project by early 2012, which will increase its capacity to 213 kilo tonnes per annum (KTPA) from 161 KTPA and captive power generation capacity by 100 MW. With some of the projects scheduled to go on stream in second half of the year, the start up, quick ramp up and speedy stabilizing of production is going to be the main focus areas of the company. At the current price of Rs 130, the stock trades at a P/BV multiple of 0.7x its expected FY14 book value per share. We are in the process of incorporating the interim results in our financial and valuation estimates and will update our subscribers soon.

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