Hindalco delivers decent performance in Q3, outlook remains subdued

Analysts have maintained 'buy' rating on stock

After a decent showing by US subsidiary Novelis on Tuesday, the Q3 show of Hindalco’s India business, albeit weak compared to the year-ago period, beat expectations. The decline in revenue and profit was expected, given the weak base metal prices and demand. 

Average global aluminium prices had dropped 11 per cent to $1,754 a tonne in Q3, while a slowdown also meant the Indian market for the metal contracted 14 per cent year-on-year (YoY) and 5 per cent during first nine months of FY20. 

Hence, the aluminium business (including Utkal operations) reported 9 per cent decline in revenue. The segment’s operating profit bore the brunt, declining 18 per cent YoY, on the back of lower realisations, which were partially offset by lower coal costs and restart of alumina production at the company’s Muri plant (after maintenance). 

While aluminium prices are likely to remain volatile, Hindalco’s continued efforts on cost control and downstream expansion should sustain profitability. The set-up of the Dumri mine will further improve coal security, while ramp-up at Utkal Alumina (where costs are half, compared to the company’s Renukoot or Muri plants), too, will help.

The performance of the copper segment continued to be muted, with subdued sale volumes due to operational issues, and Ebitda down 48 per cent YoY. Domestic copper market growth, too, was moderate at 2 per cent, highlighted Hindalco. Outlook remains subdued as the treatment and refinancing charges for calendar year 2020 have settled at 15.9 cents per pound — 23 per cent lower YoY. Though some support to profitability will come from lower input costs and rising sales of value-added products, the overall near-term outlook remains soft.

Overall, Hindalco’s standalone Q3 revenues came in at Rs 10,230 crore, and profit before tax profit at Rs 318 crore, ahead of Rs 10,207 crore and Rs 291 crore, estimated by Motilal Oswal Securities. 

While challenges persist, Hindalco’s low-cost integrated domestic operations make it less vulnerable, compared to peers. More importantly, Novelis, which is a converter of aluminium metal into value-added products, continues to clock strong performance, thereby supporting Hindalco. 

Novelis is now contributing more than half to Hindalco’s consolidated Ebitda, and the management continues to guide for sustainable Ebitda per tonne of over $400 ($430 in Q3, absolute Ebitda was up 7 per cent YoY). 

The acquisition of Aleris is in the final stages. Also, its new automotive finishing plant in Kentucky is in the commissioning process. 

Analysts at Motilal Oswal have retained their ‘buy’ rating on the Hindalco stock trading at attractive valuations and maintaining forward estimates. 

Reacting to the results, the stock closed 0.13 per cent up on Wednesday.