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Business News/ Market / Mark-to-market/  Hindalco’s domestic operations disappoint
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Hindalco’s domestic operations disappoint

The rise in Ebitda can be attributed to an increase in profit from the copper segment, which had faced some shutdowns

An increase in interest costs owing to capitalization and a fall in investment income were compensated by a one-time income of `161 crore. Photo: AFPPremium
An increase in interest costs owing to capitalization and a fall in investment income were compensated by a one-time income of `161 crore. Photo: AFP

Hindalco Industries Ltd reported weaker-than-expected earnings in the September quarter for its Indian operations. Although its Ebitda (earnings before interest, tax, depreciation and amortization) rose 4.85% from a year ago, that was owing to an increase in profit from the copper segment, which had faced some shutdowns.

Revenue from operations increased some 2.3% from a year ago. Aluminium sales rose 11.3% from a year ago as volumes increased slightly and lower LME (London Metal Exchange) prices were offset by the depreciating rupee. Although copper sales fell 2.3%, the profitability of this unit improved. Copper segment Ebit gained 14.35% while that of aluminium fell 2.35% owing to higher raw material costs.

An increase in interest costs owing to capitalization and a fall in investment income were compensated by a one-time income of 161 crore. Reported net profit was flat from a year ago, and if the one-time income was excluded, it would fall 45%.

The outlook for the domestic aluminium operations is not too bright. For one, the company is facing delays in getting coal mining rights and is embroiled in a Central Bureau of Investigation probe into coal block allocations. Inability to get captive coal affects its profitability, something which Hindalco itself admitted in a media release.

Secondly, there is overcapacity in the aluminium sector (which will worsen partly owing to Hindalco’s own expansion) and metal premia are fast falling in the aluminium sector. Although the rupee depreciation will help, if aluminium prices fall further, it will question the viability of some new projects.

The good news, though, is that with the management guiding for decreasing capital expenditure over the next two fiscal years, free cash flows might improve. In the firm’s annual general meeting, it guided for capex of 5,000 crore in this fiscal year and 2,000 crore and 1,500 crore in the next two.

The improving free cash flow story is true particularly for Hindalco’s Novelis unit, which dwarfs the local operations. This segment is also not affected by aluminium prices as it is in the finished products business.

Although Novelis’s September quarter profit fell 53% from a year ago, the unit has turned free cash flow positive as its working capital position improved. The unit’s net debt stood at $4.76 billion at the end of September compared with $4.92 billion three months earlier, according to Nirmal Bang Securities Pvt. Ltd. With improving economic conditions likely to boost demand in the West, and Novelis focusing on higher margin segments such as automobiles, the company might benefit both from volume growth and margin expansions.

But investors are still waiting for the story to fructify while remaining wary about local operations. That explains why despite the stock outperforming the S&P BSE Metal index marginally, its near-term upside is limited.

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Published: 12 Nov 2013, 08:58 PM IST
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