In the June quarter, Hindalco Industries Ltd’s stand-alone results benefited from rising aluminium prices, and better treatment and refining charges for copper; but negative factors were a strong rupee versus the dollar, and the higher prices of coal and fuel.
Revenue rose 16.5% year-on-year to Rs 6,031 crore, but operating profit margin narrowed by 170 basis points to 14.4%. One basis point is one-hundredth of a percentage point. On a sequential basis, however, margins improved by nearly a percentage point. Aluminium production during the quarter was flat due to the inadequate supply of bauxite. The output of value-added products, too, was affected due to sluggish demand and a lock-out at one of its units.
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The company’s copper division benefited from a surge in treatment and refining charges, earned by custom smelters, which were up 22% in the June quarter. A regular maintenance shutdown affected output, however. The copper business is expected to do well as Hindalco anticipates refining charges to remain firm in 2011. But the domestic aluminium business may get singed by the unfolding financial and economic situation in the Western world. The price of aluminium on the London Metal Exchange is $2,378 (Rs 1.08 lakh today) a tonne, down 9% since end-July and barely $20 short of its lowest level seen in January. At a time when costs are rising and the rupee remains strong, a reversal of the uptrend in aluminium prices—especially if it’s sustained—is not good news for Hindalco.
Some of the company’s expansion projects, which are nearing completion, will be growth drivers; but even after their commissioning, they will take time to stabilize. And, they would have benefited if prices had continued to rise.
That leaves its Canadian subsidiary Novelis Inc. to do some of the heavy lifting for the group in 2011-12. The company, which sells value-added rolled aluminium products to industries such as automobiles and beverages, does not get affected by aluminium prices, which are a pass-through to the customer. Strong demand for its products and not enough industry capacity have resulted in better conversion charges and higher profitability. Novelis’ adjusted Ebitda (earnings before interest, tax, depreciation and amortization) rose 16% in the June quarter from the year ago, while sales rose 23%. Its performance is expected to be robust due to higher demand and an increase in capacity.
Hindalco’s stock price has fallen by over one-fifth since early July as metal stocks got hammered following the unfolding of Europe’s debt crisis and the downgrade of America’s sovereign credit rating. The drop appears to price in the bad news that has emerged so far. But if events worsen, more pain may be in store. Hindalco has another uncertainty to contend with. Domestic interest rates have been rising to bring inflation in check, which may affect economic growth. So far, there is no sign of either inflation falling in line, or economic growth slowing. Still, if the rate-hike prescription works, growth may slow, and so could demand for basic commodities such as the ones Hindalco produces.
Graphics by: Ahmed Raza Khan/Mint
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