Copper segment saves the day for Hindalco in Q3

Higher volumes and realisations in the segment aid top line

Hindalco surprised the market as revenue and operating profit were above consensus estimates in the third quarter. Revenues rose six per cent annually and 15.4 per cent sequentially to Rs 7,273 crore in the December quarter, beating Street estimates by 4.3 per cent. The uptick in sales has been driven by higher volumes in both aluminium and copper. Operating profit grew eight per cent year-on-year (y-o-y) and 17 per cent quarter-on-quarter (q-o-q) to Rs 630 crore, again ahead of estimates. However, most of this surprise was eroded at the post-tax profit level, as aluminium margins contracted even as operating margins remained stable at 8.7 per cent.

Hindalco performed well on top line and operating profit, thanks to the copper segment’s growth. While copper sales grew 12 per cent sequentially to Rs 4,820 crore, Ebit margin expanded 140 basis points (bps) annually and 21 bps sequentially to 6.23 per cent.

However, aluminium continues to show stress, with costs rising but not realisations. Aluminium revenues rose 12 per cent y-o-y and five per cent q-o-q to Rs 2,470 crore but Ebit margins fell 23 bps sequentially and 245 bps annually to 6.86 per cent. Emkay Global’s Goutam Chakraborty says copper’s strong performance has been the saviour. The reason aluminium realisations have not been hit further is higher spot premiums on the London Metal Exchange. Even if demand picks up in a year, higher supplies will cap prices.

Notably, there has been a rise in Hindalco’s new projects. While the Mahan smelter produced 18,000 tonnes of aluminium, the Utkal Alumina International plant did 87,000 tonnes. In January, the Aditya smelter also produced its first metal. A segment of the market is cheering the Stage-II forest clearance for Mahan’s coal block. Angel Broking’s Bhavesh Chauhan believes this is structurally positive, as it will make Hindalco’s Mahan smelter cost-competitive once it starts production from this block. The next stage would be to sign a mining lease with the state government, which could take two-three years and would take the firm three years to reach peak production. With the firm’s thrust area continuing to be aluminium and LME prices  not showing signs of rising, the stock could remain under pressure over the next one year.