The logic of large acquisitions has come into question as losses of overseas subsidiaries have eroded the profit of many Indian companies. But Hindalco Industries Ltd’s shareholders may change their mind, after a good performance from its subsidiary Novelis Inc. Hindalco’s share price fell on Tuesday by about 11%, due to poor results of its domestic operations. But they gained as much as 9% on Wednesday after Novelis’ results were announced.
Novelis converts aluminium into products for beverage, automobile and construction companies, among others. In the September quarter, its adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) rose to $200 million (Rs942 crore) from $124 million in the previous quarter and $89 million in the year-ago period. The improvement has come partly due to cost savings extracted by the company and partly due to an improvement in volumes (up 4% sequentially). The company estimates that it is currently saving about $100 million in costs, on an annualized basis, and expects the number to jump by about 40% in a year’s time. It has also hiked conversion prices charged to customers for new contracts.
Though the short term still looks a bit uncertain in Novelis’ key market of North America, shipments have been higher in Europe, Asia and South America. In a call with analysts, the company’s management cautioned that the December quarter will be a weak one, since traditionally demand slows in this quarter. However, it expects the fourth quarter to be a good one, as it is seeing some improvement in pricing, having managed to get better prices on some new contracts. Significantly, Novelis’ infamous contracts with price ceilings, which prevent metal prices from being passed on entirely to customers, come to an end in December.
Graphics: Yogesh Kumar / Mint
Hindalco’s performance was affected in the September quarter owing to lower commodity prices. Sales were down by 13.5% to Rs4,917 crore and its net profit was down by 52% to Rs344 crore, compared with a year ago. Novelis, in comparison, turned in revenue of Rs10,000 crore, down by 26%, and a net profit of Rs984 crore, compared with a loss of Rs478 crore. A sustained improvement in the financials of Novelis will provide Hindalco shares much support. Since Hindalco expects its aluminium and copper business to face short-term challenges, any help it gets from Novelis will be welcome.