Hindalco: The meltdown continues

Prices of aluminium, which were hovering around $3,300 per tonne in July last year, have more than halved to around $1,450 per tonne. And it doesn’t look like the sheen’s coming back in a hurry. Inventories, which ranged between 0.61 to 0.91 million tonnes in 2007, are now at fifteen year highs of 28.7 million tonnes (source: Bloomberg).

Demand from China is flagging and USA’s largest producer Alcoa, which has cut production by 18 per cent in the past seven months, reckons demand in 2009 may drop 2 per cent over the one per cent fall in 2008. That could mean further production cuts. As a result, Novelis, Hindalco’s subsidiary, which caters mainly to markets in the US and Europe could stay in the red for a while longer.

What could help Hindalco though is a weaker rupee along and lower interest costs. Assuming aluminium prices stay at around $1500 per tonne in 2009-10, IDFC-SSKI estimates consolidated revenues could fall around 34 per cent with net profits plunging 88 per cent. Nalco, meanwhile, could see its profits dented by around 26 per cent on lower sales of 9 per cent next year. Both Nalco and Hindalco should continue to underperform the market.

That’s unfortunate because Indian producers are cost efficient; it’s just that current prices just about cover costs. Hindalco (stand-alone) posted flat net profits in the December 2008 quarter at Rs 545 crore helped by a higher other income. That’s despite better operating margins of 19 per cent — up 130 basis points — the result of better profitability in the copper division.

Sales were down 9 per cent to Rs 4,117 crore, better than the Street’s expectations — higher realisations from sulphuric acid and some smart hedging. Nalco was less lucky. Nalco’s net sales declined by 8 per cent to Rs 1,016 crore, while operating profit margins fell by over 1500 basis points to 24 per cent. The culprits: higher provisioning for staff costs as well as higher power and fuel costs. As a result, net profits dropped 33 per cent y-o-y to Rs 220 crore, despite providing a smaller amount for depreciation.