Stock Review: Hindalco

 

Hindalco, the country's largest aluminium producer, reported lower profitability for the fourth-straight quarter despite robust sales growth. Its operating margin is likely to remain under pressure even during the coming quarters due to higher raw material costs, and softening product prices.

Net sales grew by 27% year on-year to . 6,846.4 crore during the March 2011 quarter. Though this was the highest rate of growth in the past four quarters, it failed to reflect in its profit growth, which remained tepid. Net profit rose by just 7% to . 708.4 crore.

 

During the fourth quarter, aluminium prices were about 7-8% higher than they were in the previous quarter, touching a31-month high of above $2,700 per tonne on the London Metal Exchange. But raw material cost relative to sales shot up by 600 basis points during the period, which offset the benefit of higher product prices. Its operating profit margin declined 200 basis points to 13%. Apart from higher input costs, appreciation in the rupee against the dollar also impacted realisations. As a result, the company could not report any meaningful growth in the production of alumina and aluminium products. In the near term, production growth may remain sluggish due to the existing lockout at its Alupuram facility in Kerala.

In the copper business, production of copper cathodes rose 14%. Aluminium prices have cooled off in the current quarter so far. They are expected to be in the range of $2,500-2,600 per tonne. Some industry trackers, however, feel that increasing input cost may push product prices beyond this range. This may as well be supported by the demand pull since aluminium offtake is expected to match the expected 8% growth in GDP.

At . 203, the stock trades at 18 times its 12-month earnings. The company is expected to retain its current valuation in the coming quarters, given a buoyant demand scenario and the capacity expansion.