Aluminium companies Hindalco Ltd and National Aluminium Co. Ltd reported contrasting results for the quarter ended December. While the former beat market estimates thanks to better than expected realizations for its aluminium sales, the latter missed estimates owing to lower volumes. Still, a look at the adjoining chart of the share price of the two companies after their lows in late October suggests that the markets clearly favour an investment in Nalco in current times.
The reason, of course, is the baggage called Novelis Hindalco now carries and the huge debt it has taken for its acquisition.
A large chunk of revenues and profit now comes from the overseas subsidiary, which is expected to report a drop in profit later this month.
According to IIFL Cap research, there could be a possible inventory write-down as well at Novelis. Novelis’ infamous aluminium can contracts, which have a price ceiling, would normally have benefited from the sharp drop in aluminium prices. But the company has said that it has hedged the bulk of its requirement for its can contracts and therefore would continue to bear losses on them. Moreover, demand in the developed world has fallen off sharply and Novelis is expected to be hit badly as a result.
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Hindalco got off with a mere 7% decline in operating profit last quarter thanks to the relatively higher aluminium prices it had locked into by hedging on the London Metal Exchange. This resulted in higher than expected realizations and hence profit. But most of these hedges have expired and a similar benefit may not occur in the current quarter.
Nalco by contrast seems to have held back on sales and built up inventory since aluminium prices in December had fallen below its cash costs. Its operating profit fell by 44% on the back of an 8% decline in sales. Even after adjusting for the provision for wage revisions, profit fell by about 32%. The company also seems to have suffered from high priced inventory of raw materials.
While Nalco’s shares have risen by about 37% from its lows in October, that’s not to say that the outlook for aluminium prices have improved substantially. They continue to hover around the lows of $1,300 (Rs63,310)/tonne they hit in January and there is no sign of improvement for the next many months.
As Credit Suisse puts it in a recent research note, “We are not excited about Hindalco’s stand-alone aluminium prospects since production cuts have lagged the fall in demand and the current LME inventory is higher than 1994 levels when aluminium prices were $1,040/tonne. Any rebound in prices could be muted.”
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Graphics by Ahmed Raza Khan / Mint