Heavy metal

Non-ferrous majors churn out better March figures

With zooming non-ferrous metal prices, it's not surprising that companies from the sector have beaten analysts' expectations.

In the case of Hindalco, overall operating profit (excluding other income) has increased 47.9 per cent y-o-y to Rs 929.8 crore in the March 2006 quarter, while Nalco's operating profit grew by 62.5 per cent to Rs 970.5 crore in the same period.

For Nalco, growth in operating profit was largely powered by significantly improved performance of its chemicals (alumina) division. Nalco's alumina production increased marginally to 403,400 tonne in Q4 FY06.

Alumina realisations are estimated to have improved by 43-45 per cent y-o-y to $485-490 per tonne levels, say analysts. As a result, segment profit of the chemical division surged 126 per cent y-o-y to Rs 775.98 crore in the last quarter.

However, segment profit of its aluminium division fell 35.34 per cent y-o-y to Rs 161.66 crore, despite realisations showing an improvement of about 17.6 per cent y-o-y to $ 2,439 per tonne.

Analysts say the weaker performance of the aluminium division was largely owing to higher transfer prices of alumina. In contrast, Hindalco's key aluminium division saw segment profit expand 61.2 per cent y-o-y to Rs 713.1 crore in the last quarter.

This was owing to the company's emphasis on higher value products such as wire rods (for electrical conductors) and rolled products, coupled with its emphasis on ensuring in-house supply of energy.

Meanwhile, in its copper division, the company said that its TC/RC margins were at 17.23 cents per pound in the last quarter compared with 14.11 cents a year earlier. This division was also able to leverage incentives for exports.

However, analysts highlight that the company had incurred backwardation charges of about $200-250 a tonne during the last quarter, owing to its planned bi-annual shutdown of one of its smelters for 25 days, coupled with shutdown of another smelter for 19 days following a minor metal leakage.

Segment profit of the copper division rose 87.5 per cent y-o-y to Rs 120.1 crore in the last quarter, but it could not prevent segment profit margins from falling about 15 basis points to 6.21 per cent.

As a result, Hindalco has seen its overall operating profit margin expand only 40 basis points y-o-y to 25.4 per cent in the last quarter, while for Nalco there was a rise of 1472 basis points to 63.09 per cent.

Considering the bullish conditions in the aluminium market, the two stocks appear attractively valued, Nalco gets a discounting of about 11 times estimated FY07 earnings, while Hindalco trades at about 8 times forecast FY07 EPS.

Ashok Leyland

With an improvement in its market share of 300 basis points to 27 per cent, Ashok Leyland has turned in a good performance in FY06.

Revenues for the year were up a strong 25.5 per cent at Rs 5247.7 crore, while operating profit saw an increase of 28 per cent to Rs 540 crore. With raw material costs as a percentage of sales rising only slightly to 71.8 per cent, the operating profit margin rose to 10.3 per cent.

In the March quarter, the top line grew 19 per cent y-o-y to Rs 1734.8 crore, on the back of 11 per cent increase in volumes.

Despite an increase in raw material costs, operating profit margins at 12.6 per cent were up 88 basis points, thanks to a fall in other expenses.

The company plans to enter the light commercial vehicles segment which would improve its portfolio. It plans to spend around Rs 600 crore to increase production capacity to 100,000 units in two years from 77,000 units at present.

With the economy growing at a fast clip and road infrastructure improving, demand for commercial vehicles should continue to be strong.

Thus, commercial vehicle companies should be able to increase volumes by about 8-10 per cent each in the next two years. Higher diesel prices might, however, slow down sales.

At the current price of Rs 50.25, the stock trades at 18 times estimated FY07 earnings and 14 times FY08 earnings, and at these valuations most of the upsides appear to have been captured.

With contributions from Amriteshwar Mathur and Shobhana Subramanian