Hindalco’s stand-alone performance slips on lower aluminium output

Hindalco’s stand-alone performance slips on lower aluminium output

Hindalco Industries Ltd’s stand-alone net profit in the September quarter was below expectation at Rs434 crore compared with consensus estimates of about Rs500 crore. Although this represents a 26% growth year-on-year (y-o-y), net profit is down by 19% compared with the June quarter.

Hindalco’s larger business is its copper division, which contributes to nearly two-thirds of revenue. This business has been underperforming for a long time, affected by lower treatment and refining charges (Tc/Rc), on which custom smelting operations, such as Hindalco’s, depend upon.

In the September quarter, its copper business revenue rose by 16% on higher product realizations, but profit slipped on lower Tc/Rc rates, higher power costs and an appreciating rupee.

But Hindalco’s copper segment profit rose by 4% compared with the June quarter, perhaps due to better efficiencies and higher price realizations of by-products.

The aluminium business disappointed, which again was not altogether a surprise. Its aluminium smelter’s production has been hit since July, due to rains. Its primary aluminium production was down by 12% y-o-y.

Hindalco focused on its product mix to ensure a higher proportion of value-added products. Average London Metal Exchange aluminium prices during the quarter were up by about 15%, compensating for the lower output.

Despite a stronger rupee affecting realizations, Hindalco’s aluminium segment profit rose by 64% y-o-y, but was down by 23% on a sequential basis.

Overall, Hindalco’s operating profit margins fell by about 50 basis points y-o-y and by about 4 percentage points on a sequential basis. One basis point is one-hundredth of a percentage point.

Key factors were higher material consumption—chiefly due to a higher proportion of traded goods—and a Rs22 crore hit due to a voluntary retirement scheme payout. Though operating profit rose y-o-y by just 15%, lower interest costs and higher other income chipped in to boost net profit growth.

Hindalco’s smelter operation is expected to stabilize in the March quarter. The December quarter will also see its copper business lose volumes due to production stoppage at one smelter.

Thus, the current quarter too will see output suffer. That is unfortunate, especially for the aluminium business, as price realizations are moving up, and in the current quarter so far, are already up by 13% over the September quarter.

Hindalco said that spot Tc/Rc charges have been rising, leading to hopes that long-term contracts may be negotiated at higher rates, ending a long period of falling realizations. Better Tc/Rc rates, normalization of production and addition to output of the company’s expansion projects are near- to medium-term events to look out for.

The rupee continues to be strong, which will be a concern as realizations are linked to international prices. But Hindalco’s consolidated performance depends more on its subsidiary, Novelis Inc., which is expected to report its results on 10 November.

Any negative sentiment caused by Hindalco’s stand-alone results could be offset by a better-than-expected showing from Novelis, which is benefiting from strong demand for rolled aluminium products and rising conversion charges.

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