Novelis' integrated domestic operations add sheen to Hindalco in March

Trade war concerns and lower demand in some sectors may keep prices volatile

After a strong performance from Novelis, Hindalco’s domestic operations also reported a stable performance. Though revenues were ahead of expectations, profits were slightly below expectation. However, despite the challenges, the company expects a steady future, aided by higher efficiencies in operations. The stock was up 1.99 per cent on Thursday.
 
It was the aluminium segment which drove the overall performance in the March quarter, even though realisations were muted. The Indian aluminium business (including Utkal Alumina), which contributed about 51 per cent to domestic revenues, reported an 8 per cent year-on-year (YoY) revenue growth.
 
The segment’s profitability however, got affected by soft aluminum prices on the London Metal Exchange (LME) as well as adverse currency movement. Aluminum prices during the quarter on the LME were on an average 14 per cent lower over the year-ago period and 6 per cent on a sequential basis. Thus, the segment’s operating profit at Rs 1,043 crore was down 18 per cent YoY. This was better than expected, as weak LME prices and currency impact were partially mitigated by aluminium price hedging.
 
The copper segment, too, reported 5 per cent YoY revenue growth, which the company attributed to better realisations. However, weakness in treatment and refining charges, led to the segment’s operating profit declining 4 per cent YoY.
 
The company’s total standalone revenue for the quarter at Rs 12,455 crore was up 7 per cent YoY and ahead of analysts’ consensus estimates of Rs 12,373 crore. Operating profit for the quarter at Rs 1,733 crore however, declined 4 per cent YoY. Net profit at Rs 236 crore marginally missed analysts’ estimates of Rs 243 crore.

 
Last week, the company’s US subsidiary Novelis had reported a strong showing amidst challenges. While demand from the auto sector continues to be muted, robust beverage can demand helped the company report operating profit per tonne of $410 in the March quarter, compared to $396 in the year-ago quarter and $403 in the December quarter.
 
Moving forward, analysts expect the robust performance to sustain due to higher aluminum intensity in trucks and electric vehicles, supply tightness in the global beverage can market resulting in prices remaining firm.
 

The beverage can market is expected to post strong growth of 3-4 per cent during calendar year 2019. Analysts at Edelweiss say that despite the impending $700-million capital expenditure and $200 million tax payout in 2019-20 (FY20), Novelis will remain cash-flow positive.
 
For domestic operations, the key challenges on volatility in base metal prices on the LME will continue with trade war concerns. The inflow of cheap imports is another challenge the company will need to counter. However, integrated domestic operations remain a key positive and continued downstream expansions will aid the company. Analysts also say that stable earnings at Novelis are a key factor in keeping Hindalco’s earnings relatively insulated from the underlying LME price movements.
 
With strong free cash flows, the company continues to deleverage its consolidated net debt to operating profit, which currently stands at 2.48x (2.82x as on March 31, 2018). There has been a significant reduction in interest cost, down 15 per cent YoY at the standalone level, helped by prepayment and repricing of long-term loans.
 
Novelis is in the process of acquiring Aleris operations to drive growth. However, there is some nervousness on approvals for the same, given Tata Steel Europe’s joint venture plans falling through. The company however, said that regulatory approvals for Aleris acquisition continue to progress in line with expectations and will close by second quarter of FY20.

Meanwhile, an analyst at a domestic brokerage believes that Hindalco will continue to deleverage after a brief pause (Aleris acquisition).