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Hindalco: Weaker realizations hurt profits
Nov 13, 2013

Hindalco has announced its standalone financial results for the quarter ended September 2013. Net sales for the company increased by 2.3% YoY while net profits decreased by 0.5% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 2.3% YoY on back of lower volumes.
  • Operating profits of the company increased by 4.8% YoY due to lower input costs. Operating margins were up by 0.2% YoY.
  • Net profit declined by 0.5% YoY due to high interest cost Net margins declined by 0.1% YoY.
  • For the half year ended September 2013, net sales declined by 0.4% YoY and net profits increased by 6.1% YoY.

Standalone financial performance
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 61,635 63,049 2.3% 121,915 121,428 -0.4%
Expenditure 56,482 57,650 2.1% 112,130 111,245 -0.8%
Operating profit (EBDITA) 5,153 5,398 4.8% 9,784 10,183 4.1%
Operating profit margin (%) 8.4% 8.6%   8.0% 8.4%  
Other income 1323.7 2,798 111.4% 4338 7078 63.2%
Interest (net) 279 1,832 557.5% 1093 3319 203.6%
Depreciation 1728 1,964 13.7% 3432 3794 10.5%
Profit before tax 4470.7 4,401 -1.6% 9597 10147 5.7%
Exceptional Item   -        
Tax 882 830 -5.9% 1760 1835 4.3%
Profit after tax/(loss) 3589 3,571 -0.5% 7837 8312 6.1%
Net profit margin (%) 5.8% 5.7%   6.4% 6.8%  
No. of shares (m)         1915  
Diluted earnings per share (Rs)         9.1  
P/E ratio (x)*         12.2  
*trailing twelve month earnings

What has driven performance in 2QFY14?
  • During the quarter ended September 2013, Hindalco's topline increased by just 2.3% YoY mainly on account of lower volumes. The underperformance in topline was due to lower copper production. Alumina production was up 2% YoY at 334,000 ton, but down 4% QoQ following planned ramp-down at one of its refineries. Aluminium output was up 3% YoY at 132,000 ton, but down 5% QoQ. Copper cathode output was flat YoY, but up 13% QoQ at 77,000 ton following maintenance shutdown in 1QFY14.

  • Revenue from the aluminium business was higher by 11.3% YoY as the impact of lower realisations was offset by strong volumes. Aluminium premiums remained higher during the quarter. The company managed to produce 7,400 tons of aluminium metal at Mahan smelter and 41,000 tons of hydrate alumina at Utkal. The company has managed to add 74 pots till date at its Mahan smelter. The Aditya aluminium smelter is in an advanced stage of completion. Both the units are currently under trial run and may start getting capitalised from 4QFY14. The output has been ramped up at Mahan, with its October 2013 production at 4,009 ton. Hindalco is looking at starting metal-tapping operations at its Aditya aluminium smelter by the end of FY14.
    Cost break-up
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw Materials 39,985 40,072 0.2% 82,684 80,362 -2.8%
    % of sales 64.9% 63.6%   67.8% 66.2%  
    Staff costs 3,129 3,608 15.3% 6,031 6,633 10.0%
    % of sales 5.1% 5.7%   4.9% 5.5%  
    Power &fuel 8,065 8,822 9.4% 15,638 16,884 8.0%
    % of sales 13.1% 14.0%   12.8% 13.9%  
    Other Expenditure 5303.6 5148 -2.9% 11526 10949 -5.0%
    % of sales 8.6% 8.2%   9.5% 9.0%  
    Purchase of traded goods 0 0 NA -3749 10949 NA
    % of sales 0.0% 0.0%   -3.1% 9.0%  
    Total operating cost 56482 57650 2.1% 112130 111245 -0.8%
    % of sales 91.6% 91.4%   92.0% 91.6%  

  • Overall, Hindalco's power and fuel costs and staff costs increased by 9.3% and 15.3% YoY. However, the other operating income increased by 21.5% YoY. Hence, the EBITDA increased by 4.8% YoY. Net profits declined by 0.5% YoY. This was due to high interest cost which increased by 557.5% YoY.
What to expect?
Although Hindalco has expanded its aluminium capacity recently, low aluminium prices, sticky costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth. In the near-term, we expect slow ramp-up from the recently commissioned Mahan smelter due to delay in getting stage-II forest clearance. Without captive coal block, the Mahan smelter is expected to face cost pressures, resulting in lower return ratios over the coming two years.

At the current price of Rs 111, the stock trades at a multiple of 12.2 times its TTM P/E on a standalone basis. We maintain our Hold view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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