Hindalco: High costs hurt PAT growth in Q3

Interest, depreciation costs weigh; operating income rises 47%

High fixed costs have chipped away Hindalco's bottom line in the December 2014 quarter, though operating profit grew a robust 47 per cent. Sales grew 18 per cent year-on-year (y-o-y) to Rs 8,471 crore, marginally below the Street’s estimates. Sequentially, sales remained flat. The company's adjusted profit after tax (PAT) grew by a modest 7.5 per cent y-o-y to Rs 359 crore, primarily owing to a sharp rise in fixed costs. Sequentially, Hindalco's net profit declined 30 per cent.

Despite missing the Street's estimates on profit growth, the stock rose two per cent on Thursday. Analysts attribute this rise to operational improvement in the company and expected boost to profitability from Novelis. During the December quarter, Hindalco's operating income rose 47 per cent y-o-y and three per cent sequentially to Rs 923 crore.

Increase in depreciation, tax rate and interest costs hurt the bottom line. During the quarter, depreciation rose eight per cent y-o-y and 10 per cent quarter-on-quarter (q-o-q) to Rs 216 crore, while interest cost jumped 177 per cent y-o-y and 16 per cent q-o-q to Rs 448 crore. During the quarter, tax rate, too, rose to 24 per cent from five per cent in the second quarter.

Goutam Chakraborty of Emkay Global says: “Adjusted PAT was at Rs 360 crore, up eight per cent y-o-y, but down 30 per cent sequentially. Higher-than-expected fixed costs weigh on PAT along with higher tax rate. Ebitda (earnings before interest, taxes, depreciation and amortisation) came in line at Rs 923 crore, up 47 per cent y-o-y and three per cent q-o-q. Ebitda margin rose 208 basis points y-o-y and 25 basis points q-o-q to 10.7 per cent.”

The other positive during the quarter has been the improvement seen in the aluminium business. Aluminium segment sales grew 47 per cent y-o-y and 10 per cent q-o-q. Revenues from the copper segment, however, rose three per cent y-o-y, but declined five per cent sequentially. The earnings before interest and taxes (Ebit) margin for the aluminium improved to 10.6 per cent during the quarter from 10.2 per cent in the second quarter and 6.9 per cent a year ago. The marked improvement in the aluminium business has driven Hindalco's operating profit. Aluminium Ebit contribution was up 127 per cent on y-o-y basis and 13 per cent sequentially to Rs 384 crore. Copper Ebit was up 32 per cent y-o-y but down four per cent q-o-q to Rs 396 crore.

Operationally, Hindalco might have shown an improvement but analysts believe coal auctions and Central Bureau of Investigation probe will continue to be an overhang for the company. However, the Street expects Novelis to drive profitability in future.