Aluminium segment shines for Hindalco

Improving profit, higher free cash flows will help retire debt

Led by the aluminium segment, Hindalco delivered strong financials for the June quarter. The company was expected to put up a robust show, given the performance of global peers and beat analyst estimates, especially on the profitability front. While soft aluminium and copper prices and lower aluminium premiums, as well as planned shutdown of copper facilities, meant sales at Rs 7,501 crore declined 11.4 per cent year-on-year to come below Bloomberg consensus estimate of Rs 8,389 crore. Nevertheless, helped by cost savings due to improved efficiencies, lower coal and crude oil derivative prices, operating profits beat consensus estimate. Ebitda (earnings before interest, tax, depreciation, and amortisation) at Rs 1,132.5 crore was 30.4 per cent higher year-on-year and much ahead of Bloomberg consensus estimate of Rs 954 crore. Reported profits at Rs 295 crore, growing 44 per cent, was also much ahead of Rs 214.4-crore estimated by Bloomberg.

The copper segment saw subdued performance due to planned shutdown and copper cathode production declined 36 per cent year-on-year. And as copper prices on LME (London Metal Exchange) remained 22 per cent down year-on-year at $4,726 a tonne, the aluminium segment propped up the show.

The aluminium segment reported operating profit of Rs 901 crore, up 64 per cent year-on-year. This was led by strong volumes and cost of production improvement. Analysts at Religare Institutional Equities say steady production of 308 Ktpa (kilo-tonne per annum) and lower energy-related costs aided the operating performance. Aluminium prices per tonne on LME during the quarter at $1,571 were down 11 per cent over the same quarter last year and premiums at $90 were half of what were seen in the year-ago quarter. However, with lower raw material costs such as that of coal and operating efficiencies, the company saw huge improvement in profitability.

With this performance and company's US subsidiary Novelis's strong show, the worst seems over. Aluminium prices in the past six months have bounced from lows as aluminium remains the third-best performing base metal. Though volatility may not be ruled out, downside may be limited. Further, while fuel costs are favourable now, the company is also doing its bit as it has secured 25 per cent of its requirements through captive mines. Analysts at Motilal Oswal Securities, with price target of Rs 166, had said strong cost positioning in aluminum, support from domestic coal cost, limited room for LME to decline, improving mix at Novelis, and exit from capital expenditure (capex) phase are key positives.

But, improvement in profitability has also boosted free cash flows (FCF) and will help in debt retirement. Analysts at Religare say that with a consolidated FY17 capex of Rs 2,500-3,000 crore and a strong Ebitda trajectory, Hindalco can generate FCF of Rs 2,500 crore. They have a target price of Rs 190 for the stock trading at Rs 146.