Hindalco: Tough times ahead

With cost pressures likely to persist, margins will remain under pressure

Hindalco’s December quarter numbers illustrate the stress faced by metal producers. The sector has been hit by a double whammy of lower prices and higher costs. As a result, even as standalone revenue is up 11 per cent year-on-year to Rs 6,647 crore, net profit is down two per cent, to Rs 451 crore.

Analysts say the revenue growth has been primarily driven by the increased volumes. Despite the uptick in revenues, Ebitda is down five per cent from the year-ago period. The company says the benefits of higher volumes and realisations have been negated by a cost surge of Rs 300 crore. Higher interest costs have also affected profitability.

 

In the coming quarter, the company expects aluminium prices to fare better, as several producers have cut production in the face of rising cost and lower realisations. According to the company, the demand outlook appears positive and will be led by North America, China and major emerging nations. Aluminium consumption in India has been close to 2010 levels, thanks to lower demand from the automotive and construction sectors in the quarter. In the copper business, revenues grew on the back of higher London Metal Exchange (LME) prices and by-product credits. Volumes also rose on account of improved efficiency. Profit before interest and taxes increased 51 per cent to Rs 216 crore.

Analysts say metal prices will continue to trend downwards and cost pressures may remain sticky. Also, with Hindalco looking at capacity expansion in the coming quarters, margins will remain under pressure. PINC Research is maintaining a cautious stance on the company due to a lower LME price, sticky cost structure, delay in alumina and captive coal projects for greenfield aluminium expansions and high financial leverage. Analysts see margins improving only from FY14.

Additionally, Hindalco subsidiary Novelis reported a four per cent year-on-year decline in revenues to $2.5 billion, as shipments fell nine per cent. Lower volumes also impacted its Ebitda/tonne, which contracted by one per cent annually and 21 per cent sequentially. Even as the turnaround at Novelis is complete, analysts believe this has already been factored into Hindalco’s current stock price. The next round of growth will come from an uptick in volumes, expected only in FY14.