Hindalco Q3 results: Copper counters surge in aluminium profits

Imports and demonetisation are seen as reasons for the slump in aluminium demand, which in turn impacted Hindalco’s Q3 results

Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Hindalco Industries Ltd’s aluminium business is coasting along with an improved profit margin but its copper business is being troubled by weak domestic demand and lower realizations. demonetisation’s effect may be partly to blame for weak demand. The company’s release also mentioned imports of aluminium as a problem.

In the December quarter, aluminium output rose from a year earlier but fell sequentially by 0.3%. Revenue from this segment too declined by 0.3% but profit was up by 7.9%, reflecting a healthy jump in margins, chiefly due to higher prices. While the price of aluminium was up by 6% sequentially, the main Japan ports’ regional metal premium stood pat at $75 per tonne. This premium is paid for faster delivery of the metal by buyers. Over a year ago, this had declined by 17%. The total of the London Metal Exchange (LME) price and the premium is what accrues to the producer. The aluminium business contributed to around half of sales but to 72.7% of the total segment profit.

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Copper, however, saw segment profit decline by 9.9% sequentially, though sales increased by 7.9%. The business depends chiefly on the treatment and refining fees paid by miners who supply the concentrate, and also on realization from by-products. The LME copper price is not relevant for profits. Output was lower; the production of flat cathode fell due to a planned shutdown, while poor domestic demand affected sales of CC (continuous cast) rods. A decline in profit was due to lower output and lower realization on by-products.

In the December quarter, Hindalco’s net sales rose by 3.6% sequentially, while its Ebitda (earnings before interest, tax, depreciation and amortization) rose by 2.5%, causing a 10 basis point drop in the profit margin. This was on the back of flat aluminium output, while that of copper fell by 11%. Net profit declined by 27.1%, chiefly due to lower other income but at Rs320.4 crore was a far sight better than the year-ago loss of Rs32.5 crore.

A fair bit of what lies ahead depends on external factors. How the domestic economy grows, especially on the capital investment front, will determine if demand improves. An increase in coal and energy costs could also become a concern but as of the December quarter, Hindalco appears to be handling it well.

On the realizations front, the treatment and refining charges have stabilized but also depend on events such as a strike in Chile’s Escondida mine, buying patterns of Chinese smelters and whether copper concentrate exports from Indonesia may become possible, according to the latest newsletter from Aurubis AG, a European copper producer. In aluminium, the price situation continues to favour producers. Its overseas subsidiary, Novelis Inc., reported a jump in adjusted Ebitda from a year ago but fell sequentially. These are the main factors to track to see how Hindalco performs in the coming quarters. Its share gained 1.7% on Monday and is trading at 9.6 times its estimated FY18 earnings per share, based on mean of estimates polled by Reuters.

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