Alcoa’s results light up Hindalco

Shares of aluminium major Hindalco were up 5 per cent on Thursday, after a stellar performance from its global peer, Alcoa, during the September quarter.

During the latest quarter, Alcoa’s income increased six-fold year-on-year, on the back of improved prices and lower input costs. Average aluminium prices have increased to over $2,000 a tonne in the September quarter, from $1,700 in February 2014.

More importantly, the company reaffirmed its 7 per cent growth projection for global aluminium demand for 2014. Alcoa has also forecast a deficit in global aluminium of 0.67 million tonnes in 2014, which is good news for aluminium prices.

The other positive from Alcoa’s results is the 46 per cent year-on-year income growth in the rolled aluminium sheets division, thanks to the demand from auto makers. This augurs well for Hindalco’s US subsidiary Novelis, which is the world's largest producer of rolled aluminium products. Novelis contributes around two-third to Hindalco’s consolidated revenue and one third to the company’s profits. In the recent June quarter, Novelis reported higher shipments globally and 12 per cent year-on-year increase in sales to $2.7 billion.

Novelis is set to gain with higher demand in the automobile segment, as aluminium usage in cars is likely to increase. Vehicles with aluminium bodies are likely to constitute 18 per cent of all new cars by 2025, up from under 1 per cent, as per a forecast by Ducker Worldwide, a company that follows material usage trends. This is because car manufacturers are looking to reduce weight of vehicles, to meet the new emission standards and fuel economy thresholds.

Even as things are looking up for Novelis, Hindalco’s stock price is under pressure due to uncertainties in the Indian aluminium operations. The company’s coal blocks were de-allocated by the Supreme Court and its bauxite mines in Jharkhand were closed due to lease renewal delays.

Raw material and fuel issues weighed on the June quarter earnings, which dipped 30 percent year-on-year to Rs. 327.5 crore. Also, the company has to pay a penalty of around Rs. 500 crore, or nearly 25 per cent of its 2013-14 profits, for the coal mined in Talabira-I mine.