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Hindalco: Benign demand supply gap
Nov 20, 2010

Hindalco recently announced its 2QFY11 results. The company has reported a 19% YoY and 26% YoY growth in net sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline grows by 25% YoY during 1HFY11 driven by higher volumes due to global demand supply gap.
  • EBITDA margin contracts to 13.2% during 1HFY11 from 15% in 1HFY10 primarily due to rise in staff costs as a percentage of sales. Benefits of low-cost brownfield expansions and higher capacity utilisation kick in.
  • Other income grows by 30% YoY in 1HFY11.
  • Standalone bottomline registers a growth of 17% YoY during 1HFY11 despite temporary operational hurdles and VRS writeoffs.

Standalone financial performance
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales   48,904    58,027 18.7%   87,587   109,482 25.0%
Expenditure   43,058    51,616 19.9%   74,449     95,074 27.7%
Operating profit (EBDITA)     5,846      6,411 9.7%   13,138     14,408 9.7%
EBDITA margin (%) 12.0% 11.0%   15.0% 13.2%  
Other income        818      1,393 70.3%     1,857       2,409 29.7%
Depreciation     1,658      1,717 3.6%     3,311       3,408 2.9%
Interest        663         526 -20.7%     1,345       1,119 -16.8%
Profit before tax     4,343      5,561 28.0%   10,339     12,290 18.9%
Tax        902      1,222 35.5%     2,092       2,608 24.7%
Effective tax rate 21% 22%   20% 21%  
Profit after tax/(loss)     3,441      4,339 26.1%     8,247       9,682 17.4%
Net profit margin (%) 7.0% 7.5%   9.4% 8.8%  
No. of shares (m)            1,913.7  
Diluted earnings per share (Rs)*                 10.1  
Price to earnings ratio (x)                 21.1  
(*On a trailing 12-month basis)

What has driven performance in 2QFY11?
  • Hindalco's performance on the topline front in the first half of FY11 has been in line with our estimates for the fiscal. The company posted a 25% YoY topline growth in 1HFY11 on a standalone basis driven by higher volumes due to global demand supply gap. The performance was also driven better product and geographic mix and improved realisations. The company also benefitted from higher aluminium LME and better by-product realisations in its copper business.

  • Operations of aluminium Smelter at Hirakud were affected in July 2010 due to heavy rains and continual bad weather including lightning. As a consequence of this unforeseen outage, Hirakud aluminium production is expected to be lower by around 20,000 MT for the current fiscal. The loss due to the same will however be covered by insurance policies. Also the smelter capacity at Hirakud is expected to increase from 161 to 213 ktpa by FY12.

  • The company's low cost advantage arising from integration and captive coal for own power generation for the Hirakud smelter cushioned the adverse impact of spiralling cost escalations of crude and crude derivatives.

    Cost breakup
    (Rs m) 2QFY10 2QFY11 Change
    Raw material 31,357 36,629 16.8%
    % sales 64.1% 63.1%  
    Staff cost   2,282   2,843 24.6%
    % sales 4.7% 4.9%  
    Power and fuel   5,223   5,742 9.9%
    % sales 10.7% 9.9%  
    Other expenditure   3,572   4,301 20.4%
    % sales 7.3% 7.4%  
    Total cost 42,434 49,515 16.7%
    % sales 86.8% 85.3%  

  • Hindalco's other income and interest charges were aided by improved returns on investment with lower interest rates respectively.

What to expect?
World aluminium and copper consumptions are projected to grow by around 18% and 8% respectively in 2010. Within India, the demand for aluminium continues to be strong from all the major consuming sectors, including electrical, transportation, buildings and construction sectors. The world copper market is in a surplus state, although in India there is strong demand from the infrastructure industries, particularly power and auto.

Hindalco currently has brownfield expansion projects in Hirakud, Belgaum and Mouda. Several greenfield projects are also underway which offer sufficient visibility for the company's topline growth. Having said that the company's bottomline performance so far has not been in line with our estimates. At current price of Rs 213, the stock is trading at a multiple of 1.3 times our expected FY13 book value per share. At this juncture prices fully reflect the underlying asset value leaving little room for a bargain for investors ResearchPro subscriber can view latest updates here.

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