Aluminium: Sector shine

The upturn in the aluminium industry has helped Hindalco post good results

An upturn in the aluminium industry has helped companies operating in this sector to post improved results. As a result, Hindalco's overall net profit has grown 13 per cent to Rs 222.2 crore in the quarter ended March 31, 2004.

On Tuesday, in tune with the overall drop at the bourses, this scrip dropped around 6.4 per cent to end at Rs 1,215. Surging demand for drawing rods ( made from aluminium) which is being purchased in large quantities by private sector players involved in ramping up their transmission and power distribution network, has led to Hindalco hiking aluminium production (including alumina calcined) by 8 per cent in Q4 FY04.

Meanwhile, price realisations have also improved with the price of this metal rising to $1,750 a tonne on the LME in Q1CY04, a growth of 22 per cent year on year. As a result, EBIT of this division rose 28 per cent to Rs 263.9 crore in Q4 FY04 and EBIT margins rose 60 basis points to 30.1 per cent.

However, overall profitability growth was curbed by stagnant margins in the copper division. While production rose 13 per cent to 50, 994 tonne in the March quarter, the company had to contend with rising foreign competition due to tariff reductions.

But Hindalco's large marketing network and aggressive pricing minimised the loss of market share "" EBIT grew 72 per cent to Rs 61.2 crore in Q4 FY04 however, EBIT margins remained stagnant at 6 per cent.

Going forward, the question is whether aluminium prices would continue to remain so high "" Chinese aluminium manufacturers, in anticipation of a surge in demand in their home markets, are ramping up production capacity to 6.5 million tonne from 5.5 million tonne in 2003.

Also, capacity expansions are being undertaken by Indian players. A demand glut is anticipated in the Asian region by mid 2005 and it could result in prices dipping once again to $1,100 a tonne levels in the next 12 months.

Meanwhile, the company plans to increase its copper capacity to 500, 000 tonne per annum, which is a logical move to ensure the company has a globally competitive production process.

Sun Pharmaceuticals

Sun Pharmaceuticals has reported a 20 per cent growth in its Q4 FY04 net profit to Rs 89.22 crore. Profit growth has been assisted by an eight fold increase in other income to Rs 41.48 crore in the March quarter, primarily due to income accruing from Sun Pharmaceutical Industries (SPI), a partnership firm engaged in manufacture of pharmaceutical formulations.

However, as this is not a one - off income for the company, it needn't be excluded from the profit calculation.

Export sales of the company have grown 40 per cent to Rs 58.73 crore in Q4FY04 "" mainly due to better realisations for the company's repertoire of medications in segments such as psychiatry, neurology, cardiology and gastroenterology. However, domestic sales have declined 8 per cent to Rs 176.15 crore in the March quarter "" company sources point out that in the previous year topline was boosted by supplies worth approximately Rs 35 crore, made at a special price.

Analysts point out that this move was possibly a one-off sales strategy made at that time to reduce inventory levels "" hence the comparison has been skewed. While overall sales growth has been negligible, the company's cost structure has been rising "" research and development costs have jumped 66 per cent to Rs 14.96 crore and staff costs have jumped 32 per cent to Rs 14.29 crore.

With the company expanding its research and development activities and marketing network, an increase in this overhead is inevitable. However, operational efficiency helped to improve the company's operating profit by 17.4 per cent to Rs 95.49 crore in Q4 FY04 and operating profit margin rose 605 basis points to 40.65 per cent.

The company has proposed a 1:1 bonus issue however, with the broad sell on the markets on Tuesday, this scrip closed lower by around 2 per cent to Rs 710. Going forward exports are expected to grow aggressively with the newly built facility near Dhaka, Bangladesh expected to begin production soon.

The board of Sun Pharmaceuticals Ltd has also approved of plans to raise up to a maximum of $350 million by issuing convertible bonds or debentures to local or foreign funds, which would be used to fund the company's expansion in key markets overseas as well as in India.

With contributions from, Amriteshwar Mathur