Stock Review: Hindalco

 

Co's Operating Margins May Take Some More Quarters To Recover

 

HAD it not been for higher aluminium prices and better by-product realisation in its copper business, Hindalco's first quarter results could have been worse.

   Lower realisation in the copper business and adverse rupee movement were the major headwinds for the country's top aluminium producer. These factors, together with rising energy costs, may continue to impact its performance in the next few quarters.

   The June quarter turned out to be a tough period for Hindalco on a standalone basis, since most of the macroeconomic factors that influence its business were negative. For example, copper realisation or treatment and refining charges (TcRc) are reduced by one-thirds during the quarter from the year-ago level. Since copper division contributes two-thirds of total standalone revenue (excluding Novelis), the sharp fall in its TcRc chopped the overall operating margin by as much as 437 basis points (bps).

   The rupee appreciation of 7% against the dollar on a year-on-year basis also weighed down on the company, which earns around 25% of revenue from exports.

   The company's copper business continues to face headwinds on account of low TcRc margins. Moreover, the mine supply continued to fall short of copper concentrate demand, which escalated pressure on copper margins. The company, however, is trying to mitigate the effect of low TcRc with the help of higher realisation on by-product and lower energy input costs.

 

   Going ahead, the woes of the copper division are likely to continue since the management does not foresee an immediate reversal in spot TcRc prices. Its aluminium business, on the other hand, continues to cushion its profitability. Though it contributes one-thirds of the revenue, its share in operating profit before depreciation is much higher at 62%.

   To leverage higher demand for its aluminium products, the company is focusing on high margin value-added products. It has also chalked out plans to reduce energy and input costs by increasing the share of captive coal mining and expanding production of aluminium, the key raw material for production of aluminium.

   However, these initiatives would take at least 12-18 months to commence. And until then, the company's performance would be closely linked to fluctuation in energy and input costs. Also, its operating margin can take some more quarters to recover, given the turbulence in its copper business.