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Hindalco: Additional coal mining levy hurts profits - Views on News from Equitymaster

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  • Nov 20, 2014 - Hindalco: Additional coal mining levy hurts profits

Hindalco: Additional coal mining levy hurts profits
Nov 20, 2014

Hindalco has announced its standalone financial results for the quarter ended Sep 2014. Net sales for the company increased by 35.7% YoY while net profits decreased by 77.9% YoY. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 35.7% YoY on the back of higher volume and realization in both aluminum and copper businesses.
  • Operating profits of the company increased by 66.2% YoY due to higher aluminum volumes and record performance by copper business.
  • Net profit declined by 77.9% YoY due to high interest cost. The interest cost rose 110.6% YoY due to progressive capitalization of projects. Further there was an exceptional loss to the tune of Rs 4.3 bn that hurt profits. The loss arised mainly from creating a liability provision of Rs 5.6 bn towards mining coal from blocks that were subsequently labeled illegal. Fall in other income by 20.2% YoY too hurt profits. During 2QFY14, other income was substantially higher as it included dividend from subsidiaries and certain exceptional gains. Adjusting for the non-recurring items profits increased 42.8% YoY.
  • The D/E ratio of the company stood at 0.75x.

Financial snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 63,049 85,543 35.7% 121,428 165,505 36.3%
Expenditure 57,650 76,573 32.8% 111,245 149,050 34.0%
Operating profit (EBDITA) 5,398 8,970 66.2% 10,183 16,454 61.6%
EBDITA margin (%) 8.6% 10.5%   8.4% 9.9%  
Other income 2,798 2,234 -20.2% 7,078 4,397 -37.9%
Interest (net) 1,832 3,857 110.6% 3,319 7,233 117.9%
Depreciation 1,964 1,960 -0.2% 3,794 3,831 1.0%
Profit before tax 4,401 5,386 22.4% 10,147 9,787 -3.6%
Exceptional items - 4,312 NM - 4,312 NM
Tax 830 286 -65.6% 1,835 1,412 -23.1%
Profit after tax/(loss) 3,571 788 -77.9% 8,312 4,063 -51.1%
Net profit margin (%) 5.7% 0.9%   6.8% 2.5%  
No. of shares (m)         2,064.9  
Diluted earnings per share (Rs)         2.0  
Price to earnings ratio (x)*         34  
(*on trailing twelve months earnings)

What has driven performance in 2QFY15?
  • During the quarter ended Sep 2014, Hindalco's topline increased by 35.7% YoY mainly on account of higher volumes as well as better realizations. Aluminum volumes were higher due to ramp up in production despite a setback at Hirakud (affected by a natural calamity) mine which led to loss in output. However, substantial part of the operations has now been restored.

  • The alumina production (including Utkal) was at 531 KT during the quarter compared to 376 KT in 2QFY14. Production was higher due to ram up from greenfield sites. Utkal production stood at 240 KT while the ramp up at the Mahan smelter too gathered pace with output of 43 KT in 2QFY15. The aluminum production stood at 187 KT in 2QFY15, up 34% YoY.

  • In the copper segment, copper cathode production increased by 25% YoY to 96 KT while DAP production increased by 13% YoY to 74 KT during 2QFY15. The copper segment's net sales increased by 32% YoY to Rs 52.47 bn.

  • Aluminum business' EBIT rose to Rs 3.4 bn from Rs 1.66 bn in 2QFY14. Copper business' EBIT rose sharply from Rs 2.39 bn to Rs 4.14 bn in 2QFY15.
What to expect?
At the current price of Rs 158, the stock trades at 34 times its TTM earnings. During the current quarter, sales growth jumped substantially due to higher volumes driven by a ramp up in production at Mahan smelter, pick up in greenfield sites and better realizations. While the Aluminum LME price was higher by 11.7% YoY, a stronger rupee hurt sales. Profits were impacted by higher interest costs and lower other income and an exceptional loss. The Supreme Court in its landmark verdict declared all the allocations of coal blocks since 1993 illegal for the lack of adequate basis in awarding them. In this ruling Hindalco's 3 blocks that were operated on JV basis were quashed. Also, there was another block which was operated by the company alone which too got cancelled. And the company had to pay a penalty of Rs 295 per MT of coal that was mined till now from these illegal blocks. This resulted in a liability provision and hurt profits for the quarter.

While ramp up in greenfield capacities may help boost volumes; input cost may rise as the company will have to secure coal via auction process now. Taking into considerations these factors, we maintain our HOLD view on the stock.

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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