Hindalco Industries Ltd’s consolidated earnings appear to have disappointed investors. The main contributor to the combined entity is Novelis Inc., its Canadian unit, which makes rolled aluminium products.
Last week, Novelis reported a good set of numbers, with volumes rising 8% and sales up 22% in the March quarter from a year ago. During fiscal 2011 (FY11), net sales gained 22% and adjusted Ebitda rose 42%. Ebitda is earnings before interest, tax, depreciation and amortization and Novelis adjusts it for non-operational items such as unrealized gains and losses on derivatives, debt prepayment charges and restructuring charges.
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In FY11, Novelis reported Ebitda fell 34% to $841 million (around Rs 3,793 crore today), but after adjustments, rose by 42%. Its results pleased Hindalco’s investors and the stock rose by 6% on Friday.
But Monday saw the share price fall by 2% after Hindalco reported its consolidated earnings. A 16% drop in reported Ebitda could be one reason. But adjusted Ebitda was up by 25%. And, the adjustments to Ebitda are not a new development and most long-term investors would be aware of them. Maybe, the 66% jump in consolidated interest cost may have worried investors, since it ate away one-fifth of adjusted Ebitda. But the jump in interest costs was mainly due to a one-time charge for early repayment of Novelis’ debt, as per?Hindalco.
While Hindalco’s financial performance does not give any real cause for worry, its project updates signal a change from the previous quarter. Capacity expansion at existing locations is on course. Among new projects, some worries are emerging. Equipment for its Utkal Alumina, Mahan Aluminium and Aditya Aluminium smelters is already tied up. But it is experiencing inflationary pressures in civil and other related works. These projects are due for commissioning between end-2011 and end-2013.
In Utkal, replacement of non-performing contractors may result in an additional cost of Rs 600 crore, and Hindalco has also warned of additional time and cost overruns. At Mahan, project cost and timelines are being reviewed.
Delays in project commissioning will mean a revision in growth forecasts as well, while cost overruns will eat into the profitability of projects. Hindalco said in a statement that Utkal’s capital and project cost will still be globally competitive and value-accretive. But it could have been better, if not for the expected time and cost overruns.
On the brighter side, Novelis, which is operating at full capacity, is investing in expansion projects, which are on course for commissioning in 2012 and 2013. The disappointment on the projects front may explain the Street’s initial reaction. Investors are likely to wait for a more firm estimate on the time and cost overruns before deciding on their next move.
Graphic by Yogesh Kumar/Mint
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