Hindalco slips on weak performance by Novelis

Shares of aluminium major Hindalco fell over 3 per cent on Wednesday after its US subsidiary Novelis reported weak results.

A 20 per cent drop in operating profits during the March quarter dampened investor sentiment as the subsidiary brings in around two-third of Hindalco’s consolidated revenues and one-third of the company’s profits.

The fall in profits at the world's largest producer of rolled aluminium products was on account of three main factors. One, a strong dollar led to a sharp decline in regional metal premiums in its main markets such as Brazil and Europe thus resulting in losses to the tune of $28 million. This is an ongoing concern for the company and may continue to dampen the profits.

Two, there was a loss of $37 million due to aluminium price lag. This happens on fixed price contracts due to delays in inventory processing when prices are on an uptrend. Metal prices on the London Metal Exchange increased from under $1,700/ tonne in early 2014 to $1,850/tonne and have stabilised around these levels.

Third, outage at one of its plants during the quarter let to a net loss of $21 million. This was a one-off event.

Still, volumes increased one per cent during the quarter to 758 kilo tonnes. Revenues increased 9 per cent to $2.8 billion thanks to higher volumes, better aluminium prices and a favourable product mix from growth in automotive volumes.

During the March quarter, auto sector volumes increased 45 per cent y-o-y. Increase in aluminium usage by auto makers such as Audi AG and Ford Motors to meet the new emission norms in the US and Europe, will also benefit Novelis.

For the full year 2014-15, revenues increased 14 per cent y-o-y to $11.1 billion and operating profit increased 2 per cent y-o-y to $902 million. Novelis turned cash flow positive during the year, with free cash flow at $71 million compared to a negative $16 million in 2013-14.