Hindalco’s lower output offset by higher realizations

Hindalco’s lower output offset by higher realizations

Hindalco Industries Ltd’s investors will hope for a return to normalcy in the March quarter. Metal output during the December and September quarters was affected by production-related hiccups.

Rains had affected its aluminium smelter operations while an outage in a cooling tower in its copper operations hit copper cathode output. Thus, aluminium output was down by 6% over the year-ago period and copper output was down by 10%.

Higher realizations came to its rescue. Aluminium prices were up about 17% on the London Metal Exchange compared with the year-ago period and 13% higher sequentially. Though copper prices have shot through the roof, up 30% over a year ago, Hindalco’s copper operations depend on the treatment and refining charges (Tc/Rc) paid to custom smelters, which had been depressed for years.

Also See | Production hiccups (PDF)

But recent quarters have seen an increase, and though Tc/Rc is still down 26% over the year-ago period, on a sequential basis it has been rising.

Operating profit margin was up by about 50 basis points on a sequential basis, and down by 170 basis points compared with the year-ago period. Higher other income, flat depreciation and lower tax incidence contributed to an 8% increase in its net profit over a year ago. One basis point is one-hundredth of a percentage point.

The outlook for Hindalco looks good. Aluminium prices are holding up, and the firm expects Tc/Rc to remain steady in the near term, as market conditions are in favour of smelters. Production will also return to more normal levels, as the disruptions have been taken care of.

Its Canadian subsidiary Novelis’ profits suffered due to one-off events. Its sales were up by 10% in volume terms, revenues were up 21% to 12,000 crore and adjusted earnings before interest, depreciation, tax and amortization was up by 20%. But it incurred a loss of $46 million (about 210 crore) due to costs related to refinancing and restructuring. Novelis expects strong demand for its products, and will improve output through debottlenecking and also through acquisitions in Asia.

Hindalco’s domestic and overseas operations are set to boost output over the next few years. Concerns will be on non-ferrous metals holding on to gains, and longer term copper Tc/Rc charges, and how the commissioning of large projects affects its financials in the near term.

Graphic by Yogesh Kumar/Mint