Hindalco says coal mining delays to hit profitability

By Krishna N Das

NEW DELHI (Reuters) - Aluminium and copper producer Hindalco Industries said on Tuesday that delays in obtaining coal mining rights would weigh on its profit growth, as it will be forced to buy the fuel on the open market.

Hindalco and its chairman, billionaire Kumar Mangalam Birla, are being investigated by India's federal police as part of a probe into possible irregularities in the allocation of coal blocks to several companies over the past two decades.

The company has denied any wrongdoing, and prime minister Manmohan Singh and the coal ministry have said they were satisfied with the outcome of the allocation process.

However, Hindalco is unable to exploit the block that was allocated to it along with Mahanadi Coalfields, a unit of Coal India Ltd , and Neyveli Lignite Corp eight years ago.

The coal from the block was supposed to fuel a project currently ramping up in the eastern Odisha state which includes a bauxite mine with capacity of 4.2 million tonnes a year, a 1.5 million-tonnes-per-year alumina refinery and a smelter.

The smelter is expected to start operating by the end of the year, according to Hindalco's website.

"We will have to buy coal from the open market and will be vulnerable to market vagaries," Managing Director D. Bhattacharya told reporters in Mumbai.

The company, India's second-biggest producer of both copper and aluminium, reported a lower-than-expected net profit for its fiscal second quarter.

"Greenfield projects are ramping up as planned, however EBITDA (earnings before interest, taxes, depreciation and amortisation) streams will take time to scale up with delayed access to captive coal," it said.

FALLING PRICES

Hindalco has also been hit by falling global prices. Three-month aluminium prices on the London Metal Exchange averaged 5 percent lower in the July-September quarter from a year earlier, while copper prices averaged about 8 percent lower.

Bhattacharya said there was "degrowth in demand" for aluminium, which means that oversupply will continue in the short term as India's economy slows down.

Bhavesh Chauhan, senior analyst at Angel Broking in Mumbai, rates the company's stock "neutral".

"Looking ahead, low aluminium prices, sticky costs and delay in commencement of mining from captive blocks are expected to mute Hindalco's profitability growth over the coming two years," Chauhan said.

Hindalco's shares, which have lost a fifth of their value this year, fell slightly after it reported its second-quarter results. They were up more than 2 percent earlier on Tuesday.

Its unit Novelis Corp , the world's top maker of rolled aluminium sheets, said on Monday net income for the April-September period sank 74 percent due to overcapacity in the North American beverage can market.

(Editing by Prateek Chatterjee, Miral Fahmy and Pravin Char)