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Indal: Beating the industry

Dec 5, 2001

Indian Aluminium Ltd. (Indal) has reported second quarter and first half performance for the current financial year above industry averages. The company was the top performer in the Aluminium industry. With the anticipated turn in aluminium cycle, earnings could receive a further boost, as compared to the last nine months. In the month of November '01, aluminum prices rose by 13%, breaching the $1,400 / tonne mark. However, average price for the running quarter to date on the London Metal Exchange (LME) are lower by 13.8% compared to the same quarter of the previous fiscal. Also, aluminium prices (avg. $1,302 / tonne) are still ruling below the immediately preceding quarter. This could indicate that realisations in the current quarter, YoY, are likely to remain under pressure having an adverse bearing on operating margins. Although, the economy seems to be engineering a turnaround, growth in sale volumes in the sector are likely to remain sluggish compared to year ago levels.

Although contribution of alumina to volume sales declined by 8.6%, the division wielded adequate power to pull down overall company sales by 6%. Turnover of alumina & chemicals was hit further by a sharp slide in realisations. Alumina prices, over the past year, have come down by half from above $250 / tonne to $130 / tonne. The division has been able to stem the slide with sales of special grade alumina & hydrates increasing. Also, the drop in alumina is due to the company shifting focus on special grades & hydrates, which command higher prices.

Net Sales
  1HFY01 1HFY02 % change
Chemicals 1,998 1,715 -14.2%
Sheet 2,530 3,064 21.1%
Foil 810 892 10.1%
Extrusions 355 432 21.7%
Others 467 682 46.0%
  6,160 6,785 10.1%
Product-wise sales
  1HFY01 1HFY02 % change
Alumina 114,973 93,249 -18.9%
Sp. Al & Hydrates 38,790 42,272 9.0%
Sheet 23,695 29,960 26.4%
Foil 3,201 3,553 11.0%
Extrusions 3,219 3,879 20.5%
  183,878 172,913 -6.0%

The company seems to be making a transition of moving towards higher value added items or downstream products. The sheets business, which constituents the largest share of sales, has been the key driver of topline growth. The ongoing journey downstream is likely to have enabled the company to outperform its industry peers in 2Q and 1HFY02. Downstream products have also reported strong growth in export markets. This shift could have a salutary effect on margins. Also, the parent company, Hindalco, enjoys operating margins, which are more than double that of Indal. That said, margins in the alumina & hydrates division were adversely impacted with caustic soda prices bouncing back in FY02 to above $325 / tonne. The Kerala government has hiked power costs by 25%, which is likely to dent margins in the Alupuram plant.

In calendar year 2001, aluminium consumption is down by an estimated 6.2% in the western world and 3.2% globally. However, the rally in aluminium prices seems to indicate a turnaround in demand sooner rather than later. Also, the demand supply equation is likely witness a rapid swing, as aluminium inventories are ruling low and instability in power supply has led to shut down of capacities in North West America. Currently, 1.3 MMT of capacity (6% of global capacity) remains idle and is not expected to come onstream over the next 12-24 months.

The Appellate Authority for Industrial & Financial Reconstruction (AAIFR) has approved the rehabilitation scheme for Annapurna Foils Ltd. (AFL). In accordance with the scheme, Indal acquired an additional 24.1% stake from the promoters of AFL, raising their aggregate holding to 51%. It is likely that Indal will pump more cash into AFL to revive its operations.

All the majors, Nalco, Hindalco and Indal are planning to expand capacities. Additional foil capacity is likely to be commissioned by International Aluminium Products Ltd. (IAPL), now part of Nalco and AFL, an Indal subsidiary. With panning out of domestic economic growth demand for aluminum is likely to remain healthy in the future. However, the increased capacities could result in the markets remaining in over-supply.

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