Odd numbers

Results of non-ferrous metal majors show a mixed trend

The December 2005 quarterly results from the non-ferrous sector have been a mixed bag, despite rising aluminium prices.

In the case of Hindalco, consolidated operating profit fell 9.8 per cent y-o-y to Rs 583 crore in Q3 FY06, while Nalco's operating profit expanded 12.3 per cent to Rs 664.5 crore.

In the case of Hindalco, the lacklustre performance of its copper division resulted in a decline in profits. Operations were affected by a 25-day planned shutdown at one of its copper smelters, coupled with a 19-day shutdown at another smelter, owing to a siphon leakage.

As a result, copper cathode production fell 18.3 per cent y-o-y to 44,236 tonne in Q3 FY06. The copper division reported a segment loss of Rs 84.5 crore in the December quarter compared with a profit of Rs 79 crore a year ago.

Meanwhile, improved output of aluminium coupled with its focus on higher value products, helped Hindalco's aluminium division report a 17.1 per cent y-o-y growth in its segment profit, in Q3 FY06.

Nevertheless, Hindalco's blended operating profit margin fell 566 basis points y-o-y to 20.3 per cent in the last quarter.

Meanwhile, Nalco, was able to grow its profits because of improved prices of both aluminium and alumina on a y-o-y basis in the last quarter.

With spot alumina prices trading at about $600 a tonne compared with average realisations of $326 a tonne in Q3 FY06, players such as Nalco are expected to see improved export realisations. Nalco and Hindalco both appear reasonably priced at about 13.5 times estimated FY06 earnings.

Tata Chemicals

In the December 2005 quarter, Tata Chemicals' results were better than street expectations, in terms of net sales and operating profit growth.

The improvement in revenues is owing to higher volumes and better price realisation. Its turnover increased by 21 per cent to Rs 1,257.88 crore, while operating profit grew 30.82 per cent to Rs 170.58 per cent.

With good monsoons, fertiliser demand was strong with a revenue growth of 25.2 per cent, with an increased thrust on higher value NPK fertilisers and trading.

But segment profitability declined by 22 basis points to 8.63 per cent, mainly owing to a larger proportion of traded fertilisers.

Though revenues in inorganic chemicals grew only 10.7 per cent, segment profit margin jumped 1295 basis points to 27.22 per cent.

This is because of a price hike at the beginning of the quarter, and 27 per cent lower imports which resulted in a 5 per cent rise in domestic sales.

During the quarter, it acquired 63.5 per cent stake in Brunner Mond, UK, which is the second largest soda ash manufacturer in Europe with a 1.65-million tpa capacity.

Tata Chem's operating profit margin also went up by 101 basis points y-o-y to 13.56 per cent, mainly because of better soda ash profitability. Net profit increased only 1.26 per cent, but the company had earned a Rs 22 crore interest on tax refunds in Q3 FY05 and a 63.51 per cent fall in other income last quarter.

At its current price of Rs 233, the stock trades at about 12 times FY07 EPS, and could do better if soda ash prices remain firm.

VSNL: Expensive call

VSNL's operating revenues in the December quarter were up a disappointing 5 per cent q-o-q at Rs 977.5 crore, on modest volume increases in the enterprise segment.

Pricing pressures were reflected in the operating profit margin, which saw only a slight improvement to 21 per cent q-o-q, thanks to lower network expenses.

The company is focusing on the enterprise segment, where volume growth is almost 100 per cent per annum, though on a low base. However, given the intense competition in this space, margins are under some pressure.

The international and domestic long distance segments are estimated to have seen reasonably good volume growth at 9 per cent q-o-q and 25 per cent q-o-q respectively, in the quarter but regulatory and competitive pressures are expected to have dampened margins.

The retail broadband business is too small at present to have an impact on the profits of the company. As such, adjusted for extraordinary items, the net profit grew just 5.16 per cent q-o-q in the December quarter.

VSNL will take time to fully exploit the advantages of its international businesses, which it has acquired, through Tyco Global and Teleglobe. At the current price of Rs 370, the stock trades at 22 times estimated FY07 earnings, and appears to be a tad expensive.

With contributions from Amriteshwar Mathur and Shobhana Subramanian