Hindalco Industries Ltd fairs well for its stand-alone operations

Hindalco Industries Ltd reported better-than-expected results for its stand-alone operations—excluding the performance of Novelis Inc. The stand-alone operations account for only one-third of consolidated revenue, but around 60% of consolidated net profit. In the March quarter, the company reported a 15% quarter-on-quarter (q-o-q) increase in revenue to Rs7,647 crore and a 21% growth in earnings before interest, tax, depreciation and amortization (Ebitda, a key measure of profitability) to Rs865 crore.

Net profit rose 42% sequentially to Rs640 crore, far higher than the Street estimates of Rs550 crore. This will cheer investors, especially since it has come on the back of an improvement in operating profitability.

Revenue, too, was higher than the Street estimates, helped by slightly higher-than-expected sales of aluminium. Analysts at Motilal Oswal Securities Ltd had estimated that revenue will grow 8% sequentially to Rs7,179 crore, aided by higher realizations for both the aluminium and copper businesses. But both reported volumes and realizations were higher than the broker’s estimates. Apart from raw material costs, most other expenses were lower than what analysts had estimated, leading to an unexpected 60 basis points increase in Ebitda margin sequentially. Notably, power and fuel expenses fell by as much as 140 basis points as a percentage of revenue. A basis point is one-hundredth of a percentage point.

Additionally, both the company’s operating segments, aluminium and copper, reported strong results. Based on its segmental results, operating profit of the aluminium division jumped 56% q-o-q.

The copper division reported a 36% jump in operating profit, aided by better output, and treatment and refining charges. Since the copper business is a custom smelting operation, its profitability depends more on treatment and refining charges than on metal prices.

Motilal Oswal’s results preview report stated, “Aluminium prices are still close to marginal cost of production and producers such as Chalco (Aluminum Corp. of China Ltd) and Rusal (United Company Rusal Plc) have reported losses in the third quarter of fiscal 2012 due to lower LME (London Metal Exchange) prices. Large aluminium producers such as Rio Tinto Plc, Rusal and Norsk Hydro ASA have announced plans to cut approximately 1.6 mtpa (million tonnes per annum) of capacity located in Canada, Europe and Australia. While reduced capacity and high production cost would cap the downside in aluminium prices, the potential upside would also be limited due to subdued demand in China.”

Hindalco’s shares, which had risen more than 40% in the early part of the year, have given up most of these gains. On LME, aluminium prices have dropped 11% to $2,050 (around Rs1.08 lakh today) per tonne from a high of $2,300 earlier in the year.

The better-than-expected results announcement should lead to an upmove in the stock, although analysts and investors will wait for the consolidated results announcement and the management commentary before making material changes in their estimates.