Hindalco Industries’ aluminium prop

Hindalco Industries’ operating profit margins continued to improve in the quarter ended June, driven by its aluminum business, even as the copper segment suffered on account of high input costs and lower production.

Standalone earnings before interest, depreciation taxes and amortisation (Ebidta, or the operating profit) margins improved 60 basis points (bps) quarter on quarter to 16.1% —- the highest in the last four quarters. Year on year, however, Ebidta margins were lower by 330 bps as the company benefited from an exceptional gain of Rs 150 crore last year.

Net profit for the quarter was up 11% year on year at Rs 534.40 crore, riding on a 33% growth in revenue to Rs 5,178 crore and higher Ebit margins in the aluminium segment. The company saw its operating profits from the aluminum segment rise 21.3% year on year with Ebit margins of 29.6% thanks to higher LME prices and better mix. This segment currently contributes nearly 36% to overall revenues but nearly 80% to the bottomline.

Copper business, being a custom smelting operation where profits are dependent on treatment and refining charges, saw a drop of nearly 20% in operating profits because of a 20% decline in spot treatment and refining charges compared with the previous year. Also, this segment, which contributes largely to topline, was hit by planned shutdown of smelter for 24 days in April, 2010.

Higher energy costs and an appreciating rupee impacted the company’s net profit during the quarter despite an increase in revenues due to higher realisations from value added products.
The company is almost trebling aluminum refining and smelting capacity over the next 3-4 years to derive benefits from its higher margin aluminium segment. Also, it is focusing on reducing the energy and input costs.

Analysts believe a revival in aluminum prices on the back of improving demand-supply scenario and higher volumes once additional capacity comes on line would drive future earnings.

“Aluminium prices have rebounded from the recent low of US$1,850/t to US$2,200/t currently. We remain positive on metal price trajectory based on improving demand-supply balance and reducing LME inventory overhang, and have increased our FY12E average LME price assumption to US$2,300/t. Volume growth and cost improvements should help further boost profitability of Novelis. Over the medium term, the commissioning of Utkal and Mahaan projects, as well as improved visibility on the other projects, should be a significant stock price driver, in our opinion,” Chandrani De, CFA and analyst at Ambit Capital, wrote in a results update on Wednesday.

The stock of Hindalco has risen more than 17% in the last one month to Rs 165 .20. Most analysts see decent upside from a long-term perspective.