Stock Reivew: Hindalco

HIGH aluminium prices saved the day for Hindalco. Although aluminium production was slightly down at its Indian operations, the average London Metal Exchange (LME) prices were up 24 per cent year-on-year at $2,603 per tonne in the June quarter. This, along with other higher incomes, helped Hindalco post a20 per cent rise in standalone profits. While the standalone numbers were in line with analysts' expectations, its global subsidiary Novelis, reported above-expected results.

Going ahead, given the prevailing global scenario, Hindalco is likely to face some challenges. The declining LME aluminium prices (around $2,412 at present) do not bode well. Analysts were concerned on Novelis, as demand for its automotive and electronic segment may get impacted in the near term. Due to the near-term concerns, analysts felt the stock (down 14.3 per cent over the last one month) may continue to remain under pressure. They, however, believed that given the ongoing expansions at Novelis, as well as at Hindalco's Indian units, will help drive the company's growth from the next year. Long-term investors could use this opportunity to buy the stock on dips. At present, 78 per cent of analysts (based on Bloomberg data) have a buy rating on the stock.

HIGH REALISATIONS, OTHER INCOMES

Hindalco's standalone sales were largely driven by high LME prices, as volumes remained flat during the quarter. While aluminium prices were up, copper treatment and refining charges (TcRc) also saw a rise of 22 per cent yearon-year. However, due to the cost push – led by rising coal prices (up 30 per cent), crude derivatives (more than 20 per cent higher) and currency fluctuations – overall margins slipped. Other high incomes came to the rescue. It increased by `109 crore because of improving treasury yields and dividend from Hindalco's Australian subsidiary.

Aditya Birla Minerals (a subsidiary), having interests in Mt Gordon copper mines in Australia, reported a 28 per cent decline in copper grade output. The decline, however, had been anticipated (due to production issues), said DBhattacharya, managing director, Hindalco. He said production ramp-up is in process.

However, analysts felt the cost of mining had increased due to the strengthening of the Australian dollar against the US dollar (in which it gets paid for the produce) and that could keep a tab on margins. For Novelis, though better product mix, better product premiums and higher base metal realisations helped post a 16 per cent rise in profits in the quarter, volume and margin pressure could be seen in the near term.

ONGOING EXPANSIONS

The smelter expansion work at Hirakud from 155,000 tonnes per annum (TPA) to 161,000 TPA was completed in the March quarter. Further capacity expansion to 213,000 TPA will be completed by FY12-end. Eight projects of Hindalco and Novelis are in various stages and are expected to be commissioned between end-2011 and 2014. These should help the company sustain healthy growth in volumes in the coming years.

OUTLOOK

In light of global headwinds, profitability in the aluminium business remains a concern. Though copper prices were also down, the company said the copper concentrate business remains secured at least till January 2012, and thus, TcRc margins may not take a major hit, moving forward.

Analysts are also concerned about Novelis' nearterm prospects. While shipments by Novelis stood at 767,000 tonnes, up three per cent year-on-year, on a sequential basis it declined one per cent. Bank of AmericaMerrill Lynch reports indicated that on a sequential basis, Europe had seen a one per cent decline in demand growth. Asian demand has been flat due to weaker demand from the electronics business. South American volumes have declined nine per cent sequentially, because of cold and wet weather. While North America saw volumes grow three per cent sequentially, demand is likely to come under pressure due to the slowing economic growth. In the near term, demand for the automotive and electronic segments for Novelis remains at risk, though demand for can sheets may remain unaffected