Hindalco: flying on one engine
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Hindalco Industries Ltd’s aluminium business contributed Rs.29.1 crore to profit before interest and tax in the September quarter. It had returned a profit of Rs.253.6 crore in the June quarter. The decline can be blamed squarely on falling aluminium price realizations. Average LME (London Metal Exchange) prices have declined by 9.8% on a sequential basis during the September quarter.
But that was not all. A steep fall in regional metal premiums, which buyers pay to secure timely supplies, was an even bigger reason. According to Alcoa Inc., the Japanese metal premium was down by 47% sequentially, while Europe was down by 23.2%. The combined fall in realizations has affected Hindalco’s profits.
The ramp-up of its new aluminium capacity also means that initial costs are relatively higher. The company said that the Mahan smelter (Madhya Pradesh) has reached full capacity during the quarter, while the Aditya smelter (Odisha) is being ramped up. Once these stabilize, then costs too should stabilize. During the quarter, employee costs and other expenses saw significant increases.
Hindalco’s copper business continues to hold fort for the company. Fortunately, this business does not depend on copper prices, which have been falling, but on the treatment and refining fees earned for converting copper concentrate into copper and by-products. These fees have been relatively firm so far. That resulted in the copper business returning a profit of Rs.350 crore, up 2% sequentially.
But that is not enough. The company’s operating profit fell by 31.3% sequentially. After a lower depreciation charge, higher other income and lower tax outgo, its net profit declined by 3.7%. That is some consolation.
The business environment for Hindalco remains tough. Aluminium prices have weakened further in this quarter. Globally, companies are looking to cut production to improve the demand-supply situation. But others, including Hindalco, are hiking production too. When aluminium (all metals, in fact) prices will bottom out is a question everyone is asking, but nobody is sure of the answer.
Wait and watch is the safe strategy. For Hindalco, a key risk is if treatment and refining fees charged by its copper smelting business come under pressure. That will strain its profitability further. The next few months should give an indication of how negotiations for 2016 are panning out.
On the brighter side, the company said it has extended the tenure of its project loans. That gives it more comfort in servicing its debt, while it tides over these difficult times.
The writer does not own shares in the above-mentioned companies.