Stock Review: HINDALCO

Hindalco reported its first quarter numbers ahead of the long weekend. Domestic operations were in line with expectations while Novelis, its Atlanta-based subsidiary, performed betterthan-expected.

Higher London Metal Exchange (LME) prices in aluminium and better treatment and refining charges (TcRc) for copper were the key factors that contributed to the company's improvement sales. However, the weakening of the dollar against other currencies coupled with higher coal and crude prices curtailed the rise in profitability.

While the correction in crude oil following the turmoil in financial markets could bring some relief, high coal prices and the depreciating dollar will continue to be a bane.

Net sales from its copper business, which contributes threefourths to its total income, rose 19% over last year to . 3,940 crore primarily due to higher copper LME and by-product realisation. This was despite the shut-down of one of its smelters at Dahej in Gujarat. The smelter began operations in July 2011.

The constrained availability of bauxite to feed to its Renukoot plant led to a fall in the production of aluminium. Bauxite is a sedimentary rock from which aluminium is extracted. Moreover, tepid market conditions led to lower production of flat-rolled products. As a result, revenue growth from this segment was a mere 12% to . 2,093.

Last week, Novelis, the company's Atlanta-based subsidiary, reported a 24% rise in sales and profit. This was mainly on account of higher shipments and demand from the automobile industry. Hindalco's standalone sales were up 16% to . 6,030.87 crore where as its net profit was higher by 21% to . 644 crore. Higher input costs brought its operating profit margin down 200 basis points to 14%.

Due to the current global macroeconomic risks, the next few quarters are likely to trying for all resource based companies and Hindalco is no exception.

In India, the company continues to be encumbered by high coal prices and insurgency problems at certain locations. Though the stock has corrected significantly with the correction in the markets, at . 150, it still quotes at 12.8 times its trailing 12-month standalone earnings per share.