Strong profit points to more gains for Hindalco

After better-than-expected operating performance by Novelis, local operations post good gains

Strong gains in Hindalco’s domestic operations for September quarter and a similar feat last week by its US subsidiary Novelis justify Street reaction: On Friday, stock hit 52-week high of Rs 178, and with the results for domestic operations announced on Saturday (Monday a market holiday), upside can be seen. 

Hindalco beat Street expectations on profit, with Ebitda (earnings before interest, tax, depreciation, and amortisation) at Rs 1,156 crore for the quarter, ahead of the Rs 600 crore indicated by Bloomberg consensus estimate. This was led by operational efficiency, increased captive and linkage coal use, and capacity expansions. Gains would have been more, but for subdued prices. 

 

Aluminium prices on LME (London Metal Exchange) have rebounded from lows at the start of the year; prices year on year (y-o-y) basis were two per cent higher. Aluminium premiums (over the benchmark metal price) remained 34% down y-o-y, leading to lower aluminium total prices. 

Copper prices have not yet seen such a rebound and averaged nine per cent lower y-o-y. Thus, despite Hindalco reporting its highest-ever copper and aluminium production (up 19% y-o-y in September quarter), lower realisations led to flat revenue of Rs 9,562 crore. But, revenue was higher than estimate of Rs 8,026 crore. 
 

Although crude derivative prices hardened sequentially, significant cost efficiencies across plants and input costs led to the aluminium segment reporting strong growth in operating profit at Rs 808 crore compared to Rs 277 crore a year ago. The more profitable value-added products grew eight per cent, while wire rod production surged 36%.

Coal prices are now rising. On a sequential basis some pressure was seen, but the company has secured a good portion of its requirement in the recent coal-linkage auctions. Copper prices have been on the rise in the past few days. 

All this bodes well for Hindalco’s profit. For September quarter, net profit at Rs 440 crore was helped by one-off benefits of Rs 85 crore. Adjusted for that, profit was still much higher than Rs 124 crore a year ago. 

Hindalco’s prospects remain strong and improving cash flow should help lower debt. Novelis has raised its free cash flow forecast to $350 million in FY17 compared to $250 million earlier. While analysts at Jefferies have a target price of Rs189, target price, according to analysts polled on Bloomberg after results, stands at Rs 197.