The best is yet to come for Hindalco

Improving prospects of Novelis and India business offer comfort

After Hindalco’s US subsidiary, Novelis, reported its best ever quarterly numbers and raised its FY18 Ebitda (earnings before interest, tax, depreciation and amortisation) guidance by $50 million, all eyes were on Hindalco’s domestic (standalone) performance.

Hindalco reported a better-than-expected operational performance in the September quarter (Q2), but the numbers fell short of estimates, thanks to one-off transactions. According to analysts, this shouldn’t put off investors, as the outlook for demand and pricing, both for the domestic business and Novelis, remains good.

Higher aluminium and copper realisations continued to support the revenues, and so did the aluminium volumes. Some of the gains were offset by lower copper volumes. Thus, standalone revenue at Rs 10,308 crore, which was up eight per cent year-on-year (y-o-y) and remained flat sequentially, fell short of the Bloomberg’s consensus estimates of Rs 10,716 crore.

At the operating level, even as higher coal costs (due to constrained availability during monsoon) impacted the performance, Ebitda surged 21 per cent y-o-y at Rs 1,424 crore, and was way ahead of Rs 1,315 crore estimated. 

Hindalco’s net profit was down 11 per cent y-o-y to Rs 393 crore, due to provisions of Rs 106 crore made on account of various Supreme Court judgments. Adjusted for this exceptional item, the net profit came in at Rs 461 crore, against Rs 495 crore estimated.

The segment-wise performance offer some comfort. Even as copper business saw a nine per cent lower sales volume, its Ebitda grew 28 per cent y-o-y to Rs 467 crore helped by higher by-product realisation. Treatment and refining charge margins, which were lower for most part of the year, have started rising from September. 

Ebitda of the domestic aluminium segment, which reported a three per cent increase in sales volume, expanded 18 per cent y-o-y to Rs 957 crore. Aluminium prices on the London Metal Exchange (LME) were up 24 per cent y-o-y in Q2 (five per cent sequentially), and are likely to remain firm due to supply cuts by China. Coal costs have also normalised. 

Unlike peers, rising alumina (raw material) prices do not concern Hindalco, given its integrated operations. It is only 15-16 per cent of total costs (caustic and carbon prices), which can lead to a 3-4 per cent escalation in the cost of producing aluminium in the December quarter.

On the whole, the outlook for domestic operations remains strong, and with improving cash flows it is leading to lower debt. Hindalco has prepaid Rs 7,666 crore in FY18 so far. Novelis, with a healthy Ebitda (up 12 per cent to $302 million in Q2 after adjusting for one-off transactions), will continue to benefit from the growing can and auto sheet shipments. 

Analysts at Credit Suisse said with some upside at Novelis and continuing relative strength in LME aluminium prices, they remain positive on Hindalco.