Novelis compensates for Hindalco's domestic losses

Hindalco Industries Ltd’s domestic operations struggled in the aftermath of lower metal volumes and prices, even as costs headed north. The only spot of good news is that Novelis Inc., its international subsidiary, is doing well as rising conversion premiums for its value-added aluminium products have helped profits grow.

The company’s domestic business performance is visible in its stand-alone results. During the quarter, Hindalco said that “operational disturbances” affected its aluminium output, which declined by 12% sequentially. Its copper cathode output declined by 26%, as it executed a planned maintenance shutdown. Aluminium realizations during the quarter declined by 24% year-on-year and by 9% sequentially. The combined effect of lower volumes and realizations saw sales decline by 21.1% on a sequential basis to Rs.5,964 crore.

Material costs declined by 26.7%, which meant that its gross margins (cost of goods sold as a percentage of sales) improved, but operational expenses—salaries, power and fuel, and other expenses—increased. The net impact was a 46.5% decline in its operating profit to Rs.463 crore, and its profit after tax declined by 33.6% to Rs.425 crore. Higher other income and a lower effective tax rate stemmed the decline in net profits.

Both aluminium and copper fared badly during the quarter, with segment margins declining substantially. The company said that some of the challenges it faces are on the availability of quality bauxite and coal, input cost surges and volatile commodity prices. It should get some relief from declining coal prices, however. Aluminium prices are down by 3% since early-July.

Its copper business, which is a custom smelting operation, depends on treatment and refining charges that have been rising. But production cuts by miners may limit the availability of copper concentrate, which may affect these fees. Miners get an upper hand as limited supplies may see smelters settling for lower fees. But smelters, too, can play that game, by cutting back production.

Hindalco’s lower output may be an indirect response to the weak economy, and if so, this should become visible in the September quarter’s output numbers. The good news is that costs of inputs such as coal are becoming cheaper, providing some cushion to margins.

Its acquired business, Novelis, saved the day for the company, with adjusted Ebidta (earnings before interest, taxes, depreciation and amortization) rising by 11% sequentially to $259 million (Rs.1,440 crore today). Hindalco’s consolidated results (will be reported later) should, therefore, look better than its stand-alone numbers, though it is still likely to report a decline in profit.

Hindalco’s share fell on Tuesday after its results were announced, but investor reaction to Novelis’s results will be visible when the market re-opens, as it was announced after market hours. Novelis said demand for its products remains solid in all its operating regions with its capacity expansion plans going on schedule. Novelis will have to do the heavy lifting for Hindalco in 2012-13, as the outlook for Hindalco’s domestic business does not show any signs of improving in the near to medium term.