Problems continue to compound for Hindalco Industries Ltd’s domestic operations that had seen lower volumes and profitability in the June quarter, results for which were declared on August 14. While aluminium volumes are likely to take a few quarters to stabilise post power outages, higher raw material costs are likely to keep a tab on the company’s profitability. If that wasn’t enough, the last few days’ events have added to the woes.
First the Comptroller and Auditor General of India (CAG)’s report on coal blocks has increased uncertainty on the early clearance of the Mahan coal block in Madhya Pradesh (essential for profitability of Hindalco’s almost completed Mahan project) and now the company has been forced to shut its captive power plant at Hirakud in Orissa, consequent to orders of the State Pollution Control Board. All these have led to the stock losing eight-nine per cent post results.
Positively, its international subsidiary, Novelis, continues to remain resilient to global slowdown. The June quarter’s improving volumes and profitability, the second quarter in a row, have provided some cushion. Its outlook, too, remains robust. However, looking at the issues facing the domestic operations, analysts are tweaking their earnings estimate (by one to seven per cent for FY13 & FY14) for Hindalco and target prices for the stock. The domestic operations are of significance given that it accounts for a third of consolidated revenues, but two-thirds of profits. In this backdrop, the stock is expected to lag markets, at least till clarity relating to the coal block emerges and the Hirakud power plant is restored.
| NOVELIS CUSHION | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 80,393 | 82,562 | 89,658 |
| % change y-o-y | 12.0 | 2.7 | 8.6 |
| Ebitda | 7,672 | 8,775 | 10,080 |
| Ebitda (%) | 9.5 | 10.6 | 11.2 |
| Net profit | 3,397 | 2,951 | 3,394 |
| % change y-o-y | 38.3 | -13.1 | 15.0 |
| EPS (Rs ) | 17.7 | 15.3 | 17.0 |
| PE (x) | 6.3 | 7.3 | 6.6 |
| E: Estimates Consolidated financials Source: CapitaLine Plus, Bloomberg | |||
Novelis: On a strong footing
Novelis has continuously seen improving profitability and volumes during the last two quarters. The Ebitda (earnings before interest, depreciation, taxes and amortisation) per tonne has improved from $213 a tonne in the December 2011 quarter to $234 a tonne in the March quarter and further to $259 in the June quarter. Shipments have also improved from 682,000 tonnes in the December quarter to 748,000 tonnes in the June quarter.
Novelis’ performance is expected to improve further in the September quarter, and despite global slowdown, maintain the profitability (Ebitda of around $1.05 billion) during FY13. The expansion projects in Brazil and North America are on track and are expected to be completed by December and mid-2013, respectively.
While the Can contract business is doing well, a strong push is expected from the automobile segment. Analysts at Edelweiss Securities observe Novelis has recently signed multi-year customer contracts and the auto portion of its expansion project of about 300,000 tonnes per annum (tpa) has already been sold out. Of the balance 600,000-tpa capacity under implementation, 80 per cent would be sold to the Can segment (with visible demand) and balance 20 per cent for specialty rolled products.
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The closure of the captive power plant at the Hirakud smelter, the most cost-effective smelter with production capacity of 161,000 tpa of aluminium, has come as a blow to Hindalco. The power plant had to be stopped on the back of a breach in its ash pond causing crop damage in the nearby areas. Thus, till the time the problem is rectified, Hindalco may have to buy power from the state grid, which typically costs Rs 5- 6 a unit as compared to Rs 3-3.5 per unit for captive power. This will impact its profitability, which is already under pressure because of low aluminium prices and high raw material costs. However, if power is unavailable it could also impact production.
Average LME aluminium prices during the June quarter were at $1,985 a tonne, lower by almost 24 per cent year-on-year (y-o-y) and 10 per cent sequentially. Though rupee depreciation does provide some cushion to domestic prices, outages had already affected aluminium production and sales during the June quarter.
The 34 days of maintenance shutdown at copper facilities led to 24 per cent sequential decline in copper sales (to 71,000 tonnes) during the June quarter. In this backdrop, Hindalco’s standalone revenues declined 21 per cent on sequential basis though flat y-o-y. While repair costs surged, the management observed increase in input costs of coal, caustic soda and carbon products affected earnings by nearly by Rs 200 crore for the quarter.
The aluminium production affected by the outage is likely to take some time to reach normalcy. Analysts at Motilal Oswal Securities observe grid problems are likely to continue in Q2FY13, while those at Edelweiss believe it will take one-two quarters for production to normalise.
Moving forward, aluminium LME estimates are not too encouraging, with the ongoing global slowdown likely to keep base metal prices under pressure. Analysts at Motilal Oswal estimate average LME prices in FY13 at $1,996 a tonne before improving to $2,100 levels in FY14. Based on lower volumes expectations, analysts are cutting their FY13 estimates for Hindalco.
Expansions in India
Hindalco will commission the Hirakud smelter expansion from 155,000 tonnes to 213,000 tonnes and a 200,000 tonnes flat-rolled products facility by end-FY13. Further, the 1.5-mtpa Uktal alumina facility is also likely to get commissioned by end-FY13, although uncertainty still persists. For now, analysts are building 600,000 tonnes incremental alumina volumes from Utkal in FY14. The Mahan smelter is in an advanced stage, but the actual commissioning may get delayed due to weak LME, observe analysts. The new development (CAG report) can delay the clearance of the Mahan coal block further, which can impact the projects’ profitability substantially, feel analysts, as the company will have to use coal from other sources or import coal, which will be an expensive option.