Hindalco positives factored in?

special report

Indian companies have sought to expand globally and metals major Hindalco has been no exception to the rule. Now while this does give them access to foreign markets, on the converse side happenings on the global front will affect their volumes… and their numbers.

So the fortunes of the company are being affected by global factors such as a strike in Korea but balanced by robust demand from the automotive sector in Europe.

For the Second Quarter of FY11 (Q2FY11) Hindalco posted Net Sales of Rs. 5,859 crore and a Net Profit of Rs. 433 crore. The EPS was Rs 2.27 per share.

“For Q2FY11, Hindalco’s standalone net revenue grew by 18.6 per cent yoy (year-on-year) and 12.8 per cent qoq (quarter-on-quarter) to Rs. 5,803 crore, aided by higher prices and better product mix, though production at Hirakund was lower as operations were affected by heavy rains,” say analysts Paresh Jain and Pooja Jain of Angel Broking.

EBIDTA margins on a yoy basis were flat. On a qoq basis they fell by 414 basis points (one basis point is one/one hundredth of a percentage point) to 12 per cent on the back of higher raw material power and fuel costs and also a VRS payment at their Kalwa plant.

Novelis the company’s acquisition in Q2FY11 period recorded total volumes of 7,67,000 tonnes. “(This was) 2% below our expectation of 787kt as volumes were negatively impacted by a strike in Asia,” said Chandrani De, an analyst at Ambit. De noted that the Q2 performance of the company was higher on account of better than expected copper volumes.

Speaking about the future course of action for the company, analysts Sanjay Jain and Tushar Chaudhari of brokerage Motilal Oswal noted, “Hindalco's focus has shifted to high RoE Greenfield projects as Novelis has become self sustaining. “Aluminium production at the Indian operation is poised to increase 3x to 1.7mtpa over five years. The visibility of the Utkal refinery project is improving with its recent financial closure,” they continued.

There is in fact a tremendous scope for aluminium products in the country, going forward. “Per capita consumption which is presently at a very low level of 1kg, when compared to +25kgs in the US, is expected to grow in the coming years,” said Anand James Chief Analyst, Geojit Comtrade Ltd.

Consumption demand at this point of time is from power mainly and also from transportation, packaging, consumer durables and construction.

In a conference call the company informed that they proposed to close their high-cost operations at their Bridgnorth plant, which would reduce their annual operating cost by US $15mn. Also, it would help the company in increasing the production of high value-added products within Europe.

Even government policies will have their role to play in the future of the industry. “As regulations in airspace ease, we are likely to see a drastic change in the way we travel,” said James. Thus, the rising number or airlines is proof of the industry's expectation of a booming aviation market in the years to come, especially in the wake of road traffic unable to meet the transportation needs of a booming population. “This augurs well for the Aluminium industry in India, as transportation is aluminium's major growth driver in international markets,” James informed.

De of Ambit feels that the current valuation of the company’s share price factors in LME (London Metal Exchange) prices of 2,300 to 2,350 dollars per tonne.

“The strength in automobile sector augurs well for the aluminium industry in India. But in the next one year, the pace of growth in the automobile sector may not be as steep as what we have seen in year 2009-2010, as both India and China gear up to moderate the rising inflation,” James concluded.