Cost controls and improving efficiencies have helped Hindalco improve its performance in both domestic and international operations. Although Hindalco’s consolidated sales for the financial year ended March 2010 were down 7.9 per cent, its operating profits jumped three-fold to Rs 1,007 crore, aided by higher aluminium prices. At the net level, though, while net profit was up over seven times to Rs 3,925 crore, analysts say that after adjusting for non-recurring items, it was lower at Rs 1,086.1 crore compared to Rs 2,716.9 crore in 2008-09. Nonetheless, what’s more important is the overall outlook looks good, with sales and profits likely to rise faster.
Global biz: Easing worries
Hindalco’s major worry regarding the performance of its overseas subsidiary, Novelis, which accounts for about 68 per cent consolidated revenue, seems to be easing. Novelis generates about 85 per cent of its revenue from European and American markets. The economic slowdown in these regions, coupled with the fall in aluminium prices, has hit the company in the past. However, its performance has improved lately. Novelis’ Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne, which had dipped to about $80 last year, rebounded to $320 for the March quarter.
For 2009-10, while Novelis reported a 15 per cent decline in sales, its adjusted Ebitda was up 55 per cent, helped by cost controls. Although volumes could remain subdued, they could still grow about 3 per cent, primarily helped by growth in American markets and Asia. Also, cost savings and better pricing should help the company post better results and expand margins. Globally, aluminium prices are at $1,865 a tonne. However, analysts are expecting them to average $2,150 in 2010-11 and $2,250 in 2011-12.
| STRONG REBOUND | |||
| in Rs crore | FY10 | FY11E | FY12E |
| Net sales | 60,722 | 70,103 | 75,363 |
| Ebitda (%) | 11.50 | 11.10 | 11.50 |
| Interest | 1,104 | 1,251 | 1,357 |
| Adj PAT | 1,086 | 2,086 | 2,620 |
| EPS (Rs) | 6.10 | 10.90 | 13.70 |
| PE (x) | 21.80 | 12.20 | 9.70 |
| E: Estimates; Source: Ambit Capital | |||
Domestic biz: Robust growth
Although Indian operations account for just 32 per cent of the total consolidated revenue, they are growing faster and enjoy better profitability. The domestic aluminium business, which accounts for 11 per cent consolidated revenue, is growing at a relatively higher pace. The demand is expected to grow 8-10 per cent over the next two years, led by higher consumption in power, automobile and construction sectors. To benefit from higher domestic demand, the company is more than trebling its aluminium capacity over the next two years.
Besides aluminium, Hindalco has presence in the copper business, which accounts for almost 21 per cent consolidated revenues. The copper business reported 18 per cent growth in revenue in 2009-10, mainly helped by higher contracted TcRc (Treatment charges and Refining charges) margins. Analysts expect the business to contribute to sales growth, led by higher volumes, but may not add significantly to the operating profit considering the pressure on margins.
Investment rationale
On the back of capacity expansion, better performance of Novelis and improving demand for aluminium, especially in the domestic market, the company is expected to do well over the next two years. While Hindalco stands to gain from its focus on value-added aluminium products, it will also benefit from the expected increase in aluminium prices, currently close to the industry’s cost of production. According to Bloomberg data, out of 36 analysts that track the stock, 20 have a buy rating while 10 have a hold rating. Their average target price for Hindalco is Rs 187.73 (based on the sum-of-the-part valuation), which suggests there is enough scope for appreciation from the current market price of Rs 133 a share.
