The current challenging environment where base metal prices remain under pressure saw Hindalco’s standalone performance during the September quarter come below Street expectations, resulting in the stock falling 1.9 per cent on Tuesday. The revenues and profitability in September quarter were much lower compared to the year ago quarter as LME aluminium and copper prices have slumped 20 and 24 per cent, respectively. Moving forward, too, there is not much optimism for improvement in base metal prices, and hence, the environment remains challenging for Hindalco and other base metal producers.
On the flip side, the performance was marginally better on a sequential basis. Positively, the commissioning of Hindalco’s greenfield expansion projects can also provide some triggers. The news of Mahan coal block getting forest clearance is positive as the captive coal is important for the profitability of the Mahan project, which is expected to be commissioned during the first quarter of FY14. However, the gains will accrue only after a year, estimate analysts, given that mining production is unlikely to start till then. Giriraj Daga at Nirmal Bang observed the firm is likely to start Mahan smelter and refinery simultaneously for better profitability.
In this backdrop, the stock may see limited upside in the near-term (consensus target price of Rs 127 as per Bloomberg data) from current levels of Rs 113, but looking at attracting valuations and future plans, it can accumulated on dips for a one-three year perspective.
|In Rs crore||Q2FY13||FY13E|
|% change yoy||-1.7||–|
|% change yoy||-28.6||-7.7|
|E: Estimates, Standalone financials
Source: Company, Bloomberg
Aluminium still subdued
Aluminium LME prices averaging at $1,912 a tonne during September quarter were down three per cent sequentially (and 20 per cent year-on-year). Positively, the company increased sales of downstream products (62,000 tonnes vs 58,000 tonnes in June quarter) and earned better realisations. But, since realisation and volume gains were not adequate to cushion the decline in aluminium prices, revenues from the segment (Rs 2,105 crore) inched up just two per cent sequentially. The segment contributes 34 per cent to overall revenues.
However, the segment’s profitability took a major hit. The shutdown of the power plant at Hirakud as well as earlier grid failures resulted in higher power costs. Coal costs for Renusagar smelter were much higher as the commodity is sourced domestically. Thus, earnings before interest and tax (EBIT) at Rs 170 crore declined sharply (Rs 270 crore in June 2012 quarter and Rs 429 crore in September 2011 quarter).
Copper saves the day
Copper nevertheless boosted the profitability despite lower LME prices as it is dependant on treatment and refining charges (TcRc). D Bhattacharya, managing director at Hindalco said that TcRc were flat and added that the shutdown taken during the previous quarter has substantially increased operational performance of the copper facilities. Thus, cathode production increased 13 per cent sequentially and rod production too, was better. The segment revenues (Rs 4,066 crore) contributing 66 per cent to overall revenue improved 2.37 per cent sequentially and were flat on year-on-year basis. The profitability of the segment was boosted by lower coal costs (copper segment depends on imported coal) and improved by-product realisation. EBIT at Rs 209 crore were much higher than year ago’s Rs 148 crore and previous quarter’s Rs 76 crore, and took care of lower profitability in the aluminium segment. Overall, profits suffered much more due to substantial decline in other income as the same in June and September 2011 quarters contained dividend incomes.