Shares of Hindalco Industries Ltd rose by around 20% in two trading sessions after it posted its June quarter results, as the firm’s profits
exceeded street estimates by a wide margin. After that, in the past two trading sessions, the shares have given away almost exactly half of those gains, with investors deciding to book some profit.
While investors may have decided to take a breather, the outlook for Hindalco shares remain bright, primarily because of a significant improvement in its financing position.
Its subsidiary, Novelis Inc., is now able to manage its own cash requirements and Hindalco has cash worth Rs5,000 crore, enabling it to go ahead with its own capital expenditure plans. Indeed, the company has already started placing orders for capital goods.
It also has plans to raise $500 million (around Rs2,380 crore) by issuing depository receipts. This should ease its debt considerably and reduce interest payments related to its acquisition debt.
What’s more, aluminium prices on the London Metal Exchange have risen by at least 30% from levels of about $1,530 a tonne in mid-July to over $2,000 tonne. Aluminium prices were around $1,500 a tonne even at the beginning of the year and was the only base metal where prices had risen at a sedate pace. The sharp rise in the past month or so is good news for makers such as Hindalco, since their realizations will be higher.
In the June quarter, revenues of the company’s aluminium division fell by about 27% owing to lower realizations. Sandeep Bhatnagar / Mint
In the June quarter, revenues of the company’s aluminium division fell by about 27% owing to lower realizations. Profit before interest and tax fell by an even higher 39%. The company was able to beat street expectations of profit, however, by reporting a 111% jump in the profit of its copper division.
Conversion margins (treatment charge/refining charge) in the copper business have improved on a year-on-year (y-o-y) basis and the company has made the most of it. The numbers above are before adjusting for mark-to-market (MTM) gains or losses on foreign exchange loans and liabilities.
For the company as a whole, net profit fell by 52% y-o-y after adjusting for the MTM impact. Street expectations, however, were much lower and the adjusted net profit beat the street by about 38%. It’s no wonder the stock rose sharply soon after the results were announced.
Hindalco’s shares have now risen by about 175% from its lows in March, and trades at less than 10 times estimated earnings for the current year. If aluminium prices sustain at around the $2,000 per tonne levels, earnings estimates are likely to get revised upwards, and so will the target price for the stock.