Hindalco: Volatile aluminium prices, rising imports remain major concerns

After a strong performance by its US subsidiary Novelis, Hindalco’s domestic performance, too, was in line with expectations despite multiple challenges. Aluminium prices have remained volatile on the back of global trade war concerns, with domestic prices trending down amid rising imports.
 
The average per tonne aluminium price on the London Metal Exchange (LME) during the quarter, at $1,968, was down 4.5 per cent sequentially and 6.5 per cent year-on-year (YoY). Even domestic per tonne premiums softened to $74 from $84 in the previous quarter and $95 in the year-ago quarter.
 
The quarter also saw imports of aluminium, including scrap, at 607,000 tonnes — up 20 per cent YoY. Thus, while aluminium production remained stable and alumina production rose 2 per cent YoY, aluminium sales were down slightly at 323,000 tonnes and below estimates (ICICI Securities estimated 330,000 tonnes).
 

This was, however, compensated by the copper segment as cathode production improved 4 per cent YoY with optimal capacity utilisation. Further, continuous copper rod production (up 60 per cent YoY) and sales (up 40 per cent YoY) provided a major boost, with the plant ramping up according to schedule. Benefits accrued from rising di-ammonium phosphate production and both bi-product realisations improved, thus mitigating impact of softness in TC/RC (treatment and refining charges).
 
The company posted 8 per cent growth in revenues from India operations (including Utkal Alumina). However, lower realisations and rising costs (mainly coal and furnace oil) meant operating profits grew just 4 per cent. Nevertheless repayment and repricing of loans meant interest costs declined by 12 per cent, while lower tax expenses helped boost the bottom line by 47 per cent YoY.
 
The company expects costs to remain under control or decline. Further, the downstream expansions may lead to a rise in value-added product volumes. Analysts also remain positive on free cash flows and debt reduction. Those at Motilal Oswal Securities said the company will continue to generate free cash flows benefitting from Novelis’ strong business and fully integrated smelting operation in India.
 
Novelis remains insulated from LME price movement, being a convertor. Analysts at Edelweiss maintained their positive ratings. However, the Street in the near term may remain cautious, given trade war uncertainties, volatility in base metal prices and slowdown in auto demand for Novelis.
 
This, however, may get mitigated by higher specialty and can volumes, said an analyst at a domestic brokerage.