The global downturn and debt taken for the Novelis Inc. acquisition caused some grief for Hindalco Industries Ltd’s investors, but a gradual improvement in Novelis’ operating performance is now providing comfort. The company’s December quarter results were expected to be affected by a seasonal drop in volumes due to a decline in demand for its end-user industry.

Shipments of rolled aluminium products were up 3% over the same period last year, but down 6% on a sequential basis. The company processes aluminium metal into products for industries such as beverages and automobiles.

Revenue was down 3% sequentially to $2.1 billion (Rs9,702 crore). The drop in revenue is lower than the rate at which volumes fell due to higher aluminium prices, which are a pass-through for the company since it is a processor. Its earnings before interest, depreciation, tax and amortization (Ebitda) is at $264 million, lower than the September 2009 Ebitda figure of $434 million Ebitda. After adjusting for certain items such as goodwill impairment and gains or losses on derivatives, a different picture emerges. In the December quarter, adjusted Ebitda stood at $199 million, flat compared with the September quarter, despite lower sequential sales growth, due to an improvement in margins.

Also See Gradual Improvement (Graphic)

The company attributes the improvement in margins to its focus on cost reductions and efficiency improvements. It had a target of $140 million annualized cost savings by the second quarter of fiscal 2011, but believes this will be achieved earlier. Its adjusted Ebitda margin has improved to 9.4% from 9.1% in the preceding quarter and 5.7% in the year-ago period. The company expects the market to recover only gradually, as its main markets of America and Europe are still in the grip of a slowdown. It expects performance to improve on the back of better pricing and cost controls. A key element dragging down performance last year related to certain fixed metal price contracts, which expired last quarter. During the quarter, favourable conversion premiums, benefits of metal price lags and lower conversion costs were the key reasons driving performance.

Reported profit attributable to the controlling shareholders, for the quarter, was $68 million compared with a $1.8 billion loss in the year-ago period and $195 million in the previous quarter. While the reported results will not add much to Hindalco’s consolidated numbers, compared with the September quarter, investors can take comfort in the knowledge that Novelis is on the recovery path.

Graphic by Yogesh Kumar / Mint

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