What a difference three months makes. The September quarter results of US-based Novelis Inc., a subsidiary of Hindalco Industries Ltd, are a marked change from those of the previous quarter in more ways than one. A pre-tax profit of $62 million (about Rs299 crore) in the June quarter has given way to a pre-tax loss of $272 million in the September quarter. (In the September 2007 quarter, the company posted a pre-tax profit of $1 million).

In volume terms, shipments of rolled products rose by 1.6% in the September quarter compared with the year-ago period. That’s down only slightly from the 2.9% y-o-y volume growth in the June quarter. But growth in net sales halved from around 10% y-o-y in the June quarter to around 5% in the September quarter. The management has said the rise in input costs during the quarter was a challenge and it’s true that the cost of goods sold rose to 94% of net sales in the September quarter compared with 91% in the June quarter. But the real reason for the loss was the $185 million loss on derivative instruments.

As on 30 September 2008, the company’s total outside liabilities (debt and other current liabilities) amounted to a high 1.6 times its net orth. Net cash from operating activities was, however, negative to the tune of $390 million in the quarter. The management has said that with aluminium prices declining, its free cash flow position will improve.

Analysts have in any case been negative on the Hindalco stock, because they expect global aluminium consumption to fall sharply. The company’s extended balance sheet on account of the Novelis acquisition and its other capex plans are the other reasons for analysts’ negative sentiments. According to a Citigroup research note, “Novelis sells 70% of its volumes in the US and Europe and could be adversely impacted by the expected demand slowdown in these markets... Given the declining price scenario that we expect, there is likely to be an adverse impact on Novelis earnings."

Nobody expects Novelis to start contributing meaningfully to Hindalco’s EPS before FY11, but its September results will add to the negative sentiment.