Weaker realisations hurt Hindalco's net Q2 profit

Depressed LME prices hit realisations even as rupee fall comes to the rescue

 

Hindalco is the latest to see stagnant profit growth despite higher metal volumes in the second quarter (Q2). Its Q2 net profit remained flat year-on-year (y-o-y) at Rs 357 crore.

While lower other income is a factor for the sequential fall in net profit, lower realisations and higher costs have eroded the firm’s profitability. Also, the company’s copper and aluminium volumes have declined, sequentially, impacting profit growth.

In the September quarter, Hindalco’s aluminium sales grew 11 per cent to Rs 2,343 crore thanks to higher volumes of value-added products. However, aluminium earnings before interest and taxes (Ebit) dropped to Rs 166 crore from Rs 170 crore in the corresponding quarter last year.

The contribution aluminium to earnings has declined to 41 per cent in Q2 from 45 per cent last year and 71 per cent in the first quarter of FY14. The total metal production stood at 132,000 tonnes (excluding Mahan) during the quarter, compared to 128,000 tonnes produced in the year-ago period. In the June quarter, volumes were at 139,000 tonnes. Copper cathode volumes were up 13 per cent sequentially to 77,000 tonnes, but were below analyst estimates.

Notably, during the quarter, production of flat rolled products (value-added products that command higher margins) grew 10 per cent sequentially and five per cent annually to 65,000 tonnes. The flat rolled products account for 45 per cent of the total aluminium volumes and command higher margins.

Despite the rise in the share of value-added products, the firm’s profit margin has declined 417 basis points (bps) sequentially and 100 bps annually to 7.1 per cent. A part of this margin decline could be due to the fall in alumina production and sharp drop in international prices. While the production of value-added products increased, alumina volumes were down 334,000 tonnes in the quarter, compared to 348,000 tonnes in the June quarter of FY14.

According to Emkay Global, the firm’s bottom line has remained flat despite higher volumes owing to depressed London Metal Exchange (LME) prices. In the second quarter of last year, LME prices were at $1,910 a tonne, but they have declined to $1,781. A part of this impact is negated by the rupee’s depreciation, but not entirely. From a valuation point of view, analysts say the company is trading at 7.2x EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation), which is on the expensive side. Analysts believe getting clearances for the Mahan coal block could be a trigger for the company.