Hindalco Industries Ltd’s December quarter earnings were a mixed bag. The domestic copper business did well both in terms of better output and margins. But this was offset by lower margins in the aluminium business. Besides, the performance of its Canadian unit, Novelis Inc., came under pressure during the quarter.
Hindalco’s stand-alone sales (excluding Novelis) rose 11.3% from a year ago to Rs 6,647 crore, while its operating profit fell 3.4%.
In Hindalco’s domestic business, aluminium metal output rose 7.8% from a year ago, while copper cathode output was up by 9.4%. Power and fuel costs are the main worries for the company due to the rising cost of coal. Power and fuel costs rose 34% from a year ago, but fell 2% sequentially. Employee costs, too, have risen significantly, up by 23.2% from a year ago. The aluminium business witnessed a 13.1% rise in revenue, aided by a 5% increase in average realizations. Although the London Metal Exchange prices have fallen year-on-year, Hindalco’s realizations are higher because of the sharp depreciation in the rupee from a year ago. Even so, with costs rising at a fast pace, segment profit fell 33.4% to Rs 309.9 crore.
The copper business, on the other hand, reported a 51.1% jump in profit to Rs 215.9 crore, on the back of a 10.5% rise in revenue. Since its copper business is a custom-smelting operation, its profitability depends more on treatment and refining charges than on metal prices. These fees rose and, along with better contribution from by-products, helped the overall performance.
Novelis’ performance disappointed, which it attributed to tough economic conditions and a seasonally low quarter. While shipments fell 9% from a year ago, sales fell 4%, and adjusted earnings before interest, taxes, depreciation and amortization was down 11%.
The March quarter has begun on a positive note, as aluminium prices have risen 11% since January. This will help Hindalco offset the rise in costs. In the long run, an improvement in global economic growth and business confidence will be essential for the domestic business and Novelis’ rolled aluminium products business to outperform. Additionally, fees in the copper smelting business are also rising.
The prospects of a higher metal output due to the firm’s expansion projects going on stream in 2012 and higher contribution of captive power are medium-term positives. The risks for Hindalco include further rise in coal prices, foreign exchange volatility and a reversal in aluminium metal prices.
Hindalco’s stock fell 1.3% on Thursday, which could be attributed to the 2.1% drop in its net profit from a year ago, and the announcement of potential equity dilution. The firm plans to issue warrants, which if fully subscribed, will see a 7.8% rise in its equity base. The capital, though, will come in handy to strengthen its balance sheet and fund projects that are currently under implementation.
Also See | Quarterly Performance (PDF)