Falling aluminium prices cast a long shadow on Hindalco Industries Ltd’s September quarter results. Though average aluminium prices on the London Metal Exchange during the quarter were higher by 14.7% year-on-year (y-o-y), they fell by 8% sequentially.
The prospects of slower global economic growth and worries over the fiscal health of developed economies have affected demand and investor sentiment for the metal. In Hindalco’s other business of smelting copper, the situation is better as profit depends on treatment and refining charges it earns (which have improved), and not on London copper prices.
Sales rose by 7.2% y-o-y to Rs 6,220 crore, chiefly aided by a 15.8% jump in aluminium revenue, while copper sales rose by 2.8%, pulling down the overall growth. On a sequential basis, sales rose by 4%, with aluminium revenue rising 5.7% and copper by 3.1%. Copper segment revenue was hit by lower volume growth due to a maintenance shutdown.
If weaker aluminium prices are a concern, sharply rising input costs are a bigger worry. Thus, revenue (including other operating income) rose by 4% on a sequential basis, but total expenditure rose by 8.5%, driven by higher growth in employee costs, power and fuel. Metal companies are faced with a situation where realizations are declining, but costs of inputs, especially energy-related, are not showing a similar trend.
Ahmed Raza Khan/Mint
Hindalco’s aluminium business’ segment profit fell 28% sequentially during the quarter, while copper’s profit rose by 1.7%. Overall, the company’s net profit rose by 15.8% y-o-y toRs 502.52 crore, but it declined by 22% sequentially.
The outlook for the company is challenging. Aluminium prices have neither recovered nor reported a significant decline. Demand for aluminium in the domestic and international markets is expected to be weaker compared with projections. In copper, too, Hindalco has said treatment and refining charges are showing weak trends, which may affect this business in future.
Its Canadian subsidiary Novelis Inc. also faced the pressures of slowing global economic growth, as shipments declined by 3% y-o-y, while earnings before interest, tax, depreciation and amortization —a key measure of operating profitability—rose by 3%, but declined by 1.7% on a sequential basis.
Novelis is in a much better shape as its business in emerging markets is seeing stronger growth, and its capacity additions for these markets should see its growth improve in the longer run.
Hindalco’s stock is down by 46% from its 52-week high in January. The base effect of higher aluminium prices will continue to affect sales and profit growth in forthcoming quarters. Its expansion projects will see volumes improve from the second half of 2011-12. But production growth is unlikely to be a key valuation trigger. A recovery in prices in the London market, cheaper input costs, and a recovery in domestic demand conditions will be seen as positive triggers.