Stock Review: HINDALCO

THE robust performance of the overseas subsidiary may offer some solace to investors of Hindalco Industries at a time when its domestic operations have suffered from lower aluminium production and falling copper refining charges. The gloom on the domestic front, though, may not last long given an expected trend reversal in refining charges and new capacities going on-stream in the coming quarters.

Hindalco's operating profitability continued to remain under pressure during the September 2010 quarter despite the easing raw material prices. This was due to higher staff cost and rising finished goods expenses. But the company still reported a robust 25% growth in its net profit due to lower interest cost. Given the fact that it has repaid 2,000 crore of debt in FY 10, interest charges are expected to remain low in the coming quarters as well. This should offer some support to the bottom line.

The production volume of aluminium was lower during the September quarter on account of power outage at the Hirakhud aluminium smelter. The company is expected to report lower production even in the December quarter since full start-up and stabilisation of the smelter is expected only in the March 2011 quarter. The Hirakhud smelter expansion project, to increase capacity from 1,55,000 tonnes per annum to 1,61,000 tonnes per annum, is nearing completion. Further expansion to 2,13,000 tonnes per annum will be completed by 4QFY12. The expansion of Utkal and Mahan plants is also on track with improving visibility.

Hindalco's copper business continues to face headwinds on account of low TcRc (treatment and refining charges) margins. The company, however, is trying to mitigate the impact with the help of higher realisation on byproducts. It was also able to increase byproduct volumes by 41% during the quarter. The spot TcRc has seen a sharp jump in the last two months following smelter disruptions and maintenance shutdowns in global markets. Given the recent trend in spot TcRc, there could be some upside for the company when it renegotiates the annual benchmark TcRc during the fourth quarter.

Hindalco's overseas subsidiary Novelis reported a 16% jump in its revenue due to higher LME prices and higher conversion premiums. The company is focusing more on profitability by selling higher-margin products. This seems to be working for the company as its adjusted EBITDA increased 45% y-o-y. Going ahead, Novelis is likely to sustain its strong operating performance, as it is a dominant player in the metal cans business. The segment accounts for 60% of Novelis' product mix.

Novelis' finished products also find application in the automobile sector. As the sector is poised to do well in the coming quarters, the company may expect higher revenue share from this sector.

The Street seems to have priced in the future expected growth since Hindalco's stock has surged 40% in the past three months. As a pure commodity play, the company's future performance will be linked to the international metal prices and timely commissioning of new projects.