Stock Review: HINDALCO

Hindalco's performance in the December '10 quarter was adversely impacted by a sluggish performance in its key copper division, which accounts for nearly two-third of its quarterly sales. The company grappled with lower treatment and refining charges (TC/RC) on a year-on-year (YoY) basis in its copper division in the third quarter, coupled with production bottlenecks.

Domestic players import copper concentrate from overseas mines and their smelters produce finished products such as copper cathodes. TC/RC represent the profit margins for these smelters. Also, in Hindalco's smaller aluminium division, the company was able to only partially take advantage of average LME prices for this metal that were 16% higher in the third quarter. And that's because of production constraints at its Hirakud smelter facilities, Orissa.

As a result, Hindalco's operating profit margin declined 170 basis points YoY to 12.4 in the third quarter, despite net sales that grew 12.4% to 5974.6 crore. However, a decline in its interest cost helped net profit rise 7.8% year-on-year in the quarter under review. The quarterly results were broadly below analyst's expectations.

Players with large smelter capacity in neighbouring countries have been recently able to negotiate higher TC/RC rates with their key customers. This has raised hopes that Indian players, like Hindalco, would also be able to take advantage of this development, over the next few quarters. Also,the current buoyancy in aluminium is expected to help the company get better realisations in the short term.

The results were declared on Saturday. And on Monday, the stock managed to rise 3.9% to 219.4 on investor expectations of a pick-up in the company's performance over the next few quarters. This would also be facilitated by its production levels returning to Hindalco's peak capacity levels, going forward, on expectations of overcoming production constraints.

Meanwhile, in Hindalco's overseas subsidiary Novelis, it only partially benefited from strong demand and higher aluminium prices in the quarter, due to rising operational costs. Also, restructuring charges of $20 million related to the closure of overseas facilities, resulted in a net loss of $46 million in the third quarter.