Analysts were expecting Hindalco Industries Ltd to post a subdued performance for the March quarter, tracking the rise in its raw material costs. But as it turns out, the headwinds were stronger than expected. Operating profit (Ebitda) at the standalone level increased just 1% in the March quarter. The performance is weighed down by high costs at the aluminium business.

The copper business also lagged due to a plant shutdown and low DAP (diammonium phosphate) production. Also, the benchmark treatment and refinery charges in the copper industry moderated. As a consequence, operating profit at the copper division fell from both the previous quarter and the year- ago period (see chart).

The good news is the management expects cost pressures to ease or remain flat in the coming quarters. Domestic coal prices are more or less stable and Hindalco is said to have tied up raw material supplies. A closed plant is expected to come back on stream in the current quarter. And with the new continuous cast rod plant commissioned, it is expected to help improve business mix for the copper business in the coming quarters.

But where the company faces uncertainty is market conditions—especially on the demand and pricing fronts. Beginning 2018, aluminium prices have turned volatile. While domestic demand is strong, there remains oversupply. With the US imposing tariffs on imports and countries like China retaliating with counter-tariffs, the fear is that a trade war can worsen the demand-supply balance. “The worry is that a certain amount of dumping can take place in India," the management told analysts.

Of course, the situation is still evolving and the industry is said to be in talks with the government for protective measures. But if it turns for the worse, then it can upset Hindalco’s financials.

With the company’s US-based subsidiary Novelis Inc. on the growth path, analysts were hoping a steady performance at the stand-alone level will place Hindalco in a sweet spot.

Novelis is seeing strong profitability thanks to better operating leverage and improving demand. “Strong demand outlook in US and revival in demand in Europe/South America/Asia, aided by quality operations and sound balance sheet sets robust outlook for Novelis. Underpinned by firm outlook on Novelis and stable India operations (benefitting from high aluminium prices and integrated business model), Hindalco would continue to post stable earnings growth," Prabhudas Lilladher Pvt. Ltd said in a note last week after Novelis’s March quarter results.

The Q4 results and commentary does not provide any concrete reasons to alter this scenario. But a 22% gain in the share price over the past one year and notable contribution from domestic business (generates roughly half of Ebitda) means favourable local market conditions remain crucial for this scenario to play out.