Q3 performance: Value-added products to drive Hindalco's earnings

Investment in high-return projects to drive growth

Hindalco delivered a strong performance in the December quarter (Q3), helped by higher base metal prices, favourable product mix and debt reduction measures. However, rising raw material costs led to operating profit missing the estimates slightly, mainly due to increased price of linkage coal. Though, improved revenue mix in favour of value-added products should keep driving Hindalco’s operating performance going ahead. Besides, as most of the company’s capex is over, higher profits should reduce debt and drive earnings further. 

For Q3, Hindalco’s standalone revenue grew 11.2 per cent year-on-year (y-o-y) to Rs 11.02 billion, driven by aluminium and copper segments. Copper revenue grew 14 cent y-o-y, led by higher volumes and by-product realisation, while operating profit surged 28 per cent y-o-y to Rs 4.2 billion. 

Aluminium segment saw revenue increase by 8.3 per cent as Hindalco’s Aditya, Mahan and Utkal plants continued to operate at their rated capacities. However, its operating profit grew at a slower pace of 7 per cent y-o-y due to rising caustic soda and coal costs. Cost pressure may remain in the near-term as linkage (contracted) coal prices have been raised by Coal India. This should be offset by improving business dynamics. For one, aluminium prices on the London Metal Exchange, which on an average were up 23 per cent y-o-y in Q3, are likely to remain firm. Second, aluminium premiums (over the benchmark price) jumped 27 per cent y-o-y to $95 per tonne in Q3. Rising premiums bode well as Hindalco is reducing hedges - the company had about 50 per cent of the aluminium hedged at $2,000 levels. It has hedged about 28 per cent of its overall sales at a higher price of $2,200 per tonne, which will help in improving overall realisation according to Elara Capital analysts. Third, Hindalco continues to focus on value-added products. According to analysts, output of value-added products is seen increasing by 40,000-50,000 tonnes in FY19 and will fetch additional realisations to the tune of $70-80 per tonne. 

For its copper business, treatment and refining charges are soft, and are expected to be lower in 2018 compared to 2017. Nevertheless, the management expects higher copper cathode rod production (value-added product) to offset the impact.

Meanwhile, Hindalco’s US subsidiary Novelis also reported a strong operating performance, with its profit per tonne rising to a multi-quarter high of $305. Analysts at Edelweiss Securities are upbeat on Novelis due to its extended focus on margin-accretive value added segments for future growth, which will help maintain its current quarterly operating profit run-rate of $250 million-plus. 

Analysts at Motilal Oswal Securities remain positive of Hindalco and said that after de-risking the balance sheet, the company was now investing in high-return projects to drive growth. 

Hindalco’s net debt/operating profit ratio has declined to 2.8x in FY18 from 6.4x in FY16.