Lower realisations hit Hindalco

Operational performance was a tad ahead of estimates helped by higher output and costs savings

Hindalco’s standalone performance for the September quarter was impacted by a fall in the price of aluminium, a business which accounted for 40 per cent of revenues and nearly half of profits in FY15. Aluminium prices were down 20 per cent year-on-year and 10 per cent sequentially. Aluminium premiums were also down 75 per cent and 50 per cent, respectively, to $100 a tonne. Historically, Hindalco has managed to garner a $300-500 per tonne premium over benchmark LME aluminium prices for its produce. With prices and premiums down, profitability was hit.

With Hindalco’s new Mahan smelter now fully functional and Aditya smelter being ramped up (running at 60 per cent capacity), they produced 129,000 tonnes of aluminium versus 49,000 tonnes in the year-ago quarter. Overall sales volume was thus up 51 per cent. But, with new capacities on stream, depreciation (up 51 per cent) and interest costs (up 60 per cent) surged. So, even as aluminium segment’s revenues were up 25.8 per cent year-on-year at Rs 4,173 crore aided by a 44 per cent jump in production to 269,000 tonnes, earnings before interest and tax fell to Rs 29 crore compared to Rs 338.7 crore in the year-ago period. The surge in other income to Rs 418 crore (Rs 223 crore last year) led by an exceptional item of Rs 119 crore helped Hindalco post a profit of Rs 103 crore. Else, as Emkay analysts estimate, Hindalco would have posted a net loss of Rs 15.7 crore. Nevertheless, it would have been better than a loss of Rs 96.5 crore as estimated by Bloomberg.

There are some positives, too. Despite the coal cost surge due to loss of mines, power & fuel and other expenses grew by a relatively slower pace of 29-35 per cent (versus production). The start of Gare Palma mines, higher output from more efficient smelters, focus on cost savings and value-added products should benefit Hindalco in these adverse times. “Pushing more volume in a weak pricing scenario is expected to bring further operating leverage and cost efficiency,” say Emkay’s analysts.

Positively, Hindalco’s US-based aluminium business under Novelis reported a good show. Novelis’ earnings before interest, taxes, depreciation and amortisation at $236 million (up two per cent year-on-year) and output at 788,000 tonnes (up three per cent) were at a 10-quarter high. The gradual gains in the US economy augers well for Novelis. Since the two business models are more of a converter, their prospects are not influenced by change in metal prices. Thus, operating profit at Rs 602 crore, down 33 per cent year-on-year (and 31 per cent sequentially), were a shade higher than estimates. While a slowing China is a concern, analysts believe with metal prices close to trough and Hindalco focusing on profitability, the worst might be behind. Hindalco’s share price at Rs 79.45 apiece is also not far from its 77-month intra-day low of Rs 67.55 made in September.