Hindalco on the road to recovery

Outlook rosy for operating profit as aluminium content in automobiles set to rise in US

Shares of aluminium major Hindalco rose 24 per cent over the past six months, on expectations of a robust earnings growth in the first quarter of the current financial year. The growth is expected to be driven by higher volumes and improved realisation, both in the standalone business and its subsidiary, Novelis. Not only is the pricing environment improving in India but demand for auto aluminium sheet is also seen picking up in the US, a major market for Novelis.

After struggling with slowing demand and a sharp drop in profitability, Hindalco is expected to report a healthy volume and profit growth in the first quarter of FY15. According to Motilal Oswal's estimates, Hindalco's standalone revenue is expected to rise 29 per cent year-on-year (y-o-y) on higher volumes and operating profit is estimated to increase 58 per cent to Rs 760 crore. The brokerage expects Ebitda (earnings before interest, taxes, depreciation, and amortisation) per tonne in the aluminium segment is expected to increase $29 sequentially to $445 a tonne. While the higher volumes would be driven by incremental output from the Mahan and Aditya smelter units, Bank of America Merrill Lynch expects post-tax profit to decline sequentially due to higher depreciation and interest costs pertaining to capitalisation of new projects.

Compared to the previous quarter, prices of aluminium on the London Metal Exchange (LME) rose 5.8 per cent, even as copper on the LME declined 3.4 per cent. While the rupee's three per cent appreciation during the quarter might offset some of the LME gains, analysts expect the company's consolidated Ebitda to grow at a 18 per cent compound annual rate over FY14-17, on higher aluminium volumes in India and higher sales of flat aluminium sheets.

Last week, Alcoa reported higher-than-estimated earnings and forecast auto sheet revenue of $1.8 billion by 2018.  Alcoa has stated in its release: “The amount of aluminum body sheet content in North American vehicles is expected to quadruple by 2015 and increase tenfold by 2025 from 2012 levels.” Novelis is a leader in this market and has a 50 per cent market share. The auto sheet segment commands margins which are 2-2.5x that of beverage cans.  Axis Capital expects Hindalco's consolidated Ebitda to double in three years, led by a favourable product mix in Novelis, doubling of aluminium volumes and cost reduction, post domestic expansion.