Steady growth on higher volumes, stable margins

Unless metal prices fall sharply on LME, the prospects of Hindalco look healthy, say analysts.

Hindalco Industries’ fourth quarter numbers were in line with the estimates, but also had some positive surprises. The company benefited from improved volumes and higher London Metal Exchange (LME) prices for copper and aluminium. The surprise element was a sharp improvement in margins in the copper business, which are likely to be sustained, say analysts. Production problems during the earlier quarters due to outage at its Hirakud aluminium smelter and Dahej copper smelter were resolved, helping the company post higher volumes in the March 2011 quarter.

With capacity additions on the back of massive expansions under progress, analysts see volumes rising strongly over the next two-three years. In the medium term, most are bullish due to better volumes. Also, analysts feel the outlook on copper and aluminium prices at LME is firm and the recent correction is a temporary phenomenon. However, some gains could get offset by rising coal prices, which are likely to lead to a jump in input costs, believe analysts.
 

STEADY GROWTH
in Rs crore	Q4FY11	% chg	FY11E	FY12E
Net sales	6,846	26.80	64,169	75,825
Ebitda	1,020	11.70	8,976	10,363
Net profit	708	6.60	3,088	4,075
EPS (Rs)	3.70	6.60	16.10	21.30
Quarterly figures are of standalone Hindalco, while annual are estimated and on consolidated basis; change is y-o-y                      Source: Company, analyst reports

COPPER BOOSTS Q4 PROFITS
Hindalco’s copper and aluminium volumes remained steady during the quarter, rising six per cent to 85,000 tonnes and two per cent to 139,000 tonnes sequentially. Additionally, aluminium prices at LME were better — both sequentially and on a year-on-year basis — while copper TcRc (treatment and refining charges) margins improved sharply.

Aluminium segment profitability could have been better, but the lockout at the Allapuram plant affected extrusion volumes, leading them to decline 21 per cent sequentially. The decline was made up by improving product mix. Profits in the aluminium business, thus, grew 19 per cent (Rs 562 crore). On the other hand, profits in the copper segment were up 61 per cent at Rs 206 crore sequentially.

Beyond operational performance, the company benefited from higher other income driven by treasury gains. The company’s US-based subsidiary Novelis Inc returned capital worth $1.65 billion ($1 billion was used to repay loan of Hindalco’s special purpose vehicle, while Hindalco itself received $650 million cash). This boosted other income by Rs 27 crore, say Motilal Oswal analysts. Besides, it resulted in forex gains of Rs 41 crore. Further, respite came with lower tax outgo, thereby, boosting net profits. At Rs 708.4 crore, it was up 6.7 per cent yearly and 54 per cent sequentially.

For the year ended March, despite challenges posed by outage at Hirakud smelter and Dahej smelter as well as higher costs, Hindalco posted a decent performance led by better performance of the aluminium business. Net sales of Rs 23,859 crore increased 22 per cent, while net profit at Rs 2,137 crore increased 12 per cent during the year.

CAPACITIES TO RAMP UP VOLUMES
In 2010-11, Hindalco completed financial closure of its Rs 10,500-crore Mahan project and tied up for a debt of Rs 7,880 crore. This financial closure improves volume growth visibility, as Mahan project and the Rs 7,000-crore Utkal project are likely to start contributing by 2012-13.

The debt along with payments from its subsidiary Novelis and internal accruals, the company could use it to fund these Greenfield and brownfield projects. Hindalco plans to triple its smelting capacity to 1.6 metric tonnes per annum (mtpa) and double alumina capacity to three mtpa at an investment of $5 billion.

This should help the company achieve strong volume growth, as aluminium capacity will rise 152 per cent to 1.28 mtpa by end-CY12. Hindalco manufactures special grade alumina that commands premium of up to $250 a tonne, which according to analysts at Edelweiss Research is another strong point. The key risk to profitability is coal availability, which could put some pressure on margins.

OUTLOOK
A recovery in developed economies, higher demand in emerging markets and firm aluminium prices should lead to better performance of Hindalco as well as its subsidiary, Novelis. Although rising costs will continue to pose a challenge for Hindalco, relatively higher LME prices (aluminium) should help offset some of the cost increases. The impact of increasing coal costs should be limited to $50 million, believes analysts at Edelweiss. While TcRc margins are expected to be sustained at current levels, outlook for aluminium is likely to remain favourable. Citi in a recent report observed that aluminium is its top metal pick in a challenging environment and should trade in a range of $2,500-2,600 per tonne through 2013.

Most analysts, thereby, remain positive on the stock, which at Rs 195-level trades at 9.8 times FY12 estimated consensus earnings. However, given the recent volatility in global prices, there could be some pain in the short term.