Hindalco turns in mixed performance as copper shines

 

While overall revenue was in line with estimates, stand-alone net profit came in a bit lower. Net sales rose 29% to Rs5,315 crore, but net profit declined by 22% to Rs427 crore from the year earlier. Novelis Inc.’s results will be reported later. 

 

On a sequential basis, Hindalco’s net sales rose 8% while net profit rose 24%.

 

Copper contributed to around 65% of sales and aluminium the rest during the quarter. Copper production was up 22%. While benchmark treatment and refining charges rose sharply from a year ago, spot treatment and refining charges were at a historic low during the quarter. That is not good news for custom smelters such as Hindalco, who benefit more when these charges move up. Still, Hindalco’s realizations from this business were higher and the company said it improved its operational efficiency and lowered conversion costs as a result. Thus, net sales of this division were up 60% to Rs3,432 crore and segment profit up 38% to Rs159 crore. Slower growth in profits reflects a drop in margins.

 

In aluminium, though Hindalco’s production was higher by 5%, revenue fell 5% to Rs1,885 crore in the December quarter, compared with the year-ago period. Segment profits declined 17% to Rs438 crore. Average London Metal Exchange (LME) prices were up by around 10% during the period and Hindalco’s product mix also changed to reflect less of primary aluminium sales and more of value-added products. Still, it didn’t get the full benefit of rising LME prices. Also, the rupee’s appreciation against the dollar affected export realization. Margins were also affected because of sharply higher coal prices, the company said.

 

Apart from operating reasons, Hindalco’s net profit was hit by lower other income, down by one-third to Rs50 crore. The company said that repayment of a bridge loan for Novelis has lowered its treasury surplus. Also, it opted for early adoption of AS 30 from 1 April 2009 for accounting of derivative transactions, which has also affected net sales, expenditure and profit during the quarter.

 

Investors will now look to Novelis’ results to see if it does better than expectations, because Hindalco’s stand-alone profits have come a bit below expectations. The outlook for non-ferrous companies is good as the demand for these commodities is rising and so are prices. However, if it does not translate to better sales growth and margins for companies, then investors may have to lower their expectations. Hindalco is trading at around 12 times its estimated earnings per share for fiscal 2011, which may seem reasonable, but this factors in a nearly 44% growth in earnings. 

 

Hindalco has ongoing expansion and greenfield projects, which will come on stream in phases over the next few years. The expansion projects will create higher capacity at a relatively lower cost and the greenfield projects will make it a more significant player. While the demand outlook for both aluminium and copper is good and still improving, the December quarter results show that this need not translate to a better performance. Investors will have to wait for all the factors to fall in place before its performance improves.