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Ess Dee Aluminium: Sales down & earnings plunge - Views on News from Equitymaster

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Ess Dee Aluminium: Sales down & earnings plunge

Nov 18, 2011

Ess Dee Aluminium Limited has announced its second quarter results for financial year 2011-2012 (2QFY12). The company has reported a 1.3% YoY and 53.4% YoY fall in sales and net profit respectively. Here is our analysis of the results.

Performance summary
  • Consolidated sales for 2QFY12 declined by 1.3% YoY. The sales during 1HFY12 were up by 6.2% YOY.
  • Operating (EBITDA) margin fell 270 basis points on the back of steep rise in employee costs and higher raw material and other expenditure, as a proportion of sales. EBIDTA margin for 1HFY12 was down by 290 basis points.
  • Net profit of the company slumped by 53.4% YoY due to lower operating income further clipped by a sharp rise in depreciation outgo and higher interest expense. For 1HFY12, net profit was down by 41.5% YoY.

Consolidated financial picture
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 1,622 1,601 -1.3% 3152.76 3349.57 6.2%
Expenditure 1,176 1,204 2.4% 2277.49 2514.45 10.4%
Operating profit 446 397 -11.0% 875 835 -4.6%
Operating margins (%) 27.5% 24.8%   27.8% 24.9%  
Other Income 32 47 47.3% 64.81 95.62 47.5%
Interest (net) 61 83 35.3% 114.06 156.06 36.8%
Depreciation 48 109 127.8% 95.79 177.28 85.1%
Reversal of impairment of assets 103 -   103    
Profit before Tax 472 252 -46.7% 833 597 -28.3%
Extraordinary item - -        
Tax 67 63 -5.7% 159.07 203.16 27.7%
Minority interest - -        
Loss after Tax on account of merger - -        
Profit after Tax/(Loss) 405 189 -53.4% 674 394 -41.5%
Net profit margin (%) 25.0% 11.8%   21.4% 11.8%  
No. of Shares (m)         32  
Diluted earnings per share (Rs)*         28  
Price to earnings ratio (x)*         4.8  
* trailing twelve month earnings

What has driven performance in 2QFY12?
  • The company's sales saw a marginal decline of 1.3% YoY during the quarter.

    Cost break-up...
      2QFY11 2QFY12 Change in basis points
    As % of net sales      
    Total cost of goods sold 63.4% 64.0% 58.68
    Employee costs 4.1% 5.3% 114.72
    Other expenditure 5.0% 6.0% 96.94

  • Higher employee costs, raw material costs and other expenditure shaved off 270 basis points from the operating margin. As a percentage of sales, each of the employee costs and other expenditure were up by 100-115 basis points during the quarter. Even cost of goods sold to sales ratio, which was expected to fall on higher utilisation of the billet caster plant, has actually gone up by 59 basis points during the quarter. Thus the EBITDA margin which had been projected by the management to expand to around 30% on raw material cost benefit has declined to 25% during the quarter.

  • Apart from higher operational costs, a 35% rise in interest costs on working capital loans to fund Hoera plant commissioning coupled with 128% jump in depreciation has further taken the sheen off the battered operating income. Although other income grew by 47% during the quarter, it was too little to save the earnings that plummeted by 53% YoY.

What to expect?
At a price of Rs 134 the stock is trading at 1.7 times our estimated FY13 earnings.

The company's earning guidance for 2QFY12 has gone completely haywire. The management had projected the utilisation rate of 60% for the 11,000 tpa caster billet plant and increase in volume offtake by 1500 to 7500 tonnes during the quarter. This apparently has not taken place due to problems encountered in stabilization of the caster plant. Thus on account of poor utilisation of the caster plant, not only the cost savings on conversion that were to be margin accretive have diminished but in all probability it has led to difficulty in procurement of foil stock from GARMCO which coupled with weak rupee has actually inflated the cost of goods bill for the company during the quarter.

These appear to be teething problems that are expected to get resolved after the caster billet plant gets stabilized over the next few quarters. The volumes are expected to increase to 28,000-30,000 tpa in FY12 from the present 24,000 tpa. Additionally it will reduce aluminium foil imports and conversion costs boosting the company's EBIDTA margin to around 30%. The company has said that expansion of its Daman facility will ramp up capacity from 37,000 to 42,000 tpa by FY13. Thus with robust demand and long term potential remaining bright, we would advise investors to keep holding on to their positions and watch the development over the next couple of quarters. However, we would advice against taking any further positions.

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