Hindalco: Braving rough weather

Benign outlook for aluminium to keep earnings under pressure

Hindalco's domestic business as-well-as its US subsidiary Novelis' profitability remains under pressure on declining aluminium prices and premiums, even as volumes are rising led by expansions. The macro environment for base metals remains weak and in the backdrop Hindalco's standalone performance for June'15 quarter was weak.

Sales at Rs 8,517 crore (up 7.4% year-on-year) came 5% lower than Bloomberg consensus estimates of Rs 8,969 crore. While volumes supported topline and to some extent Ebidta (which at Rs 877 crore was higher than consensus estimate of Rs 718 crore), capacity expansions led to a sharp increase in depreciation (up 40% to Rs 332 crore) and finance costs (up 78% to Rs 740 crore). Thus, net profit at Rs 107 crore was lower than estimates of Rs 164 crore.

The pressure on profitability can be gauged from the decline in aluminium premiums (realisation over LME prices). Per tonne LME aluminium prices have declined from an average of $1,798 in year ago quarter and $1,800 in March'15 quarter to $1,767 in June'15 quarter.

But, premiums are down sharply. At $170 a tonne during June'15 quarter, these were significantly lower than $315 in March'15 quarter and $289 in June'14 quarter, and are taking away benefits of higher volumes.

Consequent to the ongoing ramp-up at Mahan and Aditya smelters, Hindalco's domestic aluminium production increased to 264,000 tonnes compared to 190,000 tonnes in Q1'FY15 and 242,000 tons in Q4'FY15.
 

Alumina production also increased to 592,000 tonnes compared to 428,000 tonnes in Q1'FY15 and 515,000 tonnes in Q4'FY15. Higher volumes benefitted only revenues which at Rs 3,966 crore were up 32% year-on-year, while profitability was under pressure. EBIT for the segment at Rs 254 crore declined 20% year-on-year and 17% sequentially.

Comparatively, the copper segment (over half to revenues) was also under pressure. Though Hindalco says treatment and refining charges (Tc/Rc) improved over last year, it seems to have been softer sequentially as is indicated by EBIT.

The segment's EBIT at Rs 344 crore was up 8.45% year-on-year but fell by 11.8% sequentially. Company's cathode production at 102,000 tons improved over 96,000 tonnes in previous quarter and 100,000 tonnes in year ago quarter. However, copper revenues declined 7.6% year-on-year and 11.9% sequentially, led by declining copper prices.

Looking at the weak outlook for commodities, analysts are cutting their earnings estimates. Analysts at Motilal Oswal Securities have cut their FY16 and FY17 LME aluminium price forecast to $1,710 and $1,750 per tonne from $1,790 and $1,900, respectively for Hindalco's India smelting business given the global oversupply. Further, while cutting realised spot premium estimates by $50/tonne, they have reduced their target price for Hindalco to Rs 125 from Rs 179.

The stock closed at Rs 93.30 on Friday, a gain of 2.6%. While part of it can be attributed to the better operating performance, the stock has also been on a decline lower in the last one year.