Though prospects of businesses, especially Indian operations, remain strong, risks appear stronger.
Even though when Hindalco recorded strong quarterly numbers, its share price took a hit on Tuesday. With a loss of 3.3 per cent, it was the fourth worst performing stock in the Sensex, which declined 1.1 per cent. The BSE Metal Index, however, fell 2.6 per cent.
Net sales of the company jumped 43 per cent on a year-on-year basis and 2 per cent sequentially to touch Rs 5,404 crore. This was largely driven by better realisations, as share of value-added products (like flat-rolled products, extrusion and copper-cathode rods) in total revenues rose. Operating profit nearly tripled to Rs 835 crore, though up just 12 per cent sequentially, mostly helped by a 1,000-basis-point drop in raw material costs. However, net profit more than doubled to Rs 664 crore, as there was a tax outgo vis-à-vis tax refund of Rs 110 crore a year ago. Analysts reckon that the overall outlook for metal prices is pulling the company’s share price down, rather than fundamentals.
One of the lowest cost producers of aluminium has been witnessing sustained selling pressure as aluminium prices crashed to $1,400 a tonne last year. With the Chinese government trying to put a lid on the heating economy, traders have increased their risk aversion. Last week, aluminium has seen a 8.1 per cent erosion in prices along with other metals. The share price of Hindalco has had a strong correlation with the price of the metal on the London Stock Exchange; many times they seem to move in tandem.
Going ahead, prices are expected to improve as the risk aversion decreases. The aluminum business is expected to continue its strong growth due to prospects of recovery in global markets, strong domestic demand, timely completion of scheduled expansion projects, improved visibility and positive outlook for Novelis. Its fixed price contracts, which bind the company to sell at lower prices, are likely to expire by November, which may improve the company’s cash flow. However, the low-margin but key copper business (70 per cent of overall revenues) may pull down the overall performance. This is because treatment charges and refining charges (TC/RC) margins are likely to remain low. According to the company, the annual benchmark TCRC for 2010 has been settled at 38 per cent lower than the previous year.
