Stock Review: HINDALCO

Despite a better performance from its Canadian entity Novelis, Hindalco's consolidated fourth quarter earnings failed to impress investors. Over the next few months, the profitability of the company could be under pressure due to higher fuel and other input costs. However, investors can take heart from the company's extensive greenfield and brownfield plans and the turnaround in Novelis' operations.

During the fourth quarter, Novelis, which contributes more than half of Hindalco's total revenue, increased its net sales by 22% year-on-year to $2,960 million (. 13,024 crore). From a loss of $1 million (. 4.4 crore), the company posted a profit of $50 million (. 2,200 crore).

This turnaround was on the back of an eight per cent increase in shipments and a 16% rise in the price of LME aluminium over the yearago period. Novelis doesn't have its own aluminium mines and therefore buys the raw material, processes it and sells it to various user industries.

While it was able to pass on the cost of the metal, the steep rise in alumina and power, which constitute about 65-70% of the production cost, negatively impacted its operating profit margin by 100 basis points. LME aluminium spot prices, which peaked in April, have corrected since.

However, the price of this base metal is expected to receive support from the cost push in alumina and power and as a result of higher inventories.

To retain its place as a global leader in the manufacturing of aluminum rolled products, Novelis plans to continue its thrust on premium products, which now comprise over 70% of its product portfolio.

Its capacity expansion in Brazil is expected to be complete by the end of 2012, while its Korean expansion is expected to finish by 2013.

For the year ended March 2011, Hindalco's consolidated net sales rose 19% to . 72,078 crore on the back of higher volumes, an improved product mix and higher commodity prices. Its consolidated operating profit margin declined 500 basis points due to higher input costs.

On account of a notional loss on derivatives and higher interest costs stemming from capital restructuring, the company's net profit declined 37% to . 2,456 crore, which caused earnings per share to fall to . 12.84 against . 22.17 the previous year. At . 197, the stock trades at a price earnings ratio of 15.3 times.