Hindalco: Operationally strong Q2, adjusted PAT up 43%

Provisions for penalty on coal from cancelled mines hurt bottom line

The faith foreign institutional investors (FIIs) have reposed in Hindalco doesn’t seem misplaced, going by the firm’s performance in the September quarter. FIIs were big buyers of Hindalco in the second quarter, in which revenues grew 36 per cent year-on-year (y-o-y) to Rs 8,554 crore and seven per cent sequentially. Before adjusting for the provisions for the coal block penalties, Hindalco's adjusted profit after tax during the quarter grew 43 per cent y-o-y to Rs 510 crore. After factoring in the provisions and liabilities arising out of coal block cancellations, post-tax profit dropped to Rs 79 crore.

According to analysts, sales growth has been driven by higher volumes and earnings by higher realisations. During the quarter, Hindalco produced 187,000 tonnes of aluminium compared to 140,000 tonnes in the year-ago period. Its copper production rose from 77,000 tonnes to 96,000 tonnes, thanks to a ramp-up in the Mahan smelter.

Of the total revenue of Rs 8,554 crore, aluminium accounts for Rs 3,316 crore. Revenue from the copper business jumped to Rs 5,247 crore from Rs 3,974 crore in the corresponding quarter last year.

Hindalco’s production and profit margins have shown a dramatic improvement. Its operating income has risen 66 per cent to Rs 897 crore. Operating margin jumped 190 basis points to 10.5 per cent during the quarter, on better treatment and refining charges in the copper segment. Goutam Chakraborty of Emkay Global says: “Operationally, it has been a good quarter for Hindalco. Copper remained stronger with an Ebit (earnings before interest and tax) margin of 7.9 per cent, an increase of 187 basis points y-o-y. However, we believe uncertainty in the domestic business remains an overhang.”

The firm’s net profit dropped to Rs 78 crore on provisions made by it under exceptional items. The company has made a liability provision of Rs 593 crore towards penalty for the coal extracted from the Talabira-I mine between FY04 and September 2014. The Supreme Court has levied an additional Rs 295-a-tonne on coal mined from blocks, which were cancelled. Another Rs 258 crore has been provided for diminution in carrying value of investments in Aditya Birla Minerals, Australia. Rs 29 crore has been provided for reversal of the UP Tax on Entry of Goods into Local Areas Act. After adjusting for all these liabilities and a forex gain of Rs 361 crore, Hindalco’s net profit declined but analysts are looking at the adjusted profit, which has shown a dramatic improvement.