(Naveen Kumar Saini/Mint )
(Naveen Kumar Saini/Mint )

Domestic business profit squeeze to keep a cap on Hindalco’s stock

  • Hindalco’s domestic business has been weighed down by lower realizations
  • The net profit of the India business slumped by 77% in the first quarter ended June

Shares of Hindalco Industries Ltd hit an air pocket soon after the company its lower-than-anticipated first-quarter results. The stock caved in after the results were announced, losing about 2% on Friday.

The domestic business has been weighed down by lower realizations and higher costs. Despite the fact that the company reported stable aluminium production, stand-alone revenue dropped 5.7% in the June quarter.

Aluminium metal sales, however, were up 7% from a year ago. Copper sales were sluggish and remained just about the same as last year, but it was still lower than what analysts pencilled in.

Higher sales of aluminium and value-added products were expected to buoy its performance. But that did not happen. Aluminium and metal realizations were considerably low for its domestic arm. A sharp drop in global metal prices have impacted its business. Higher imports have also hit the domestic business.

As a result, the company’s aluminium division saw a huge fall in Ebitda by 42% due to lower realizations. Ebitda is earnings before, interest, taxes, depreciation and amortization.

In its copper business, sales of value-added products were up 3% from a year ago. But here, too, sluggish volumes and realizations have been weighing down performance. This pulled down its copper division Ebitda by 23%.

Margin improvement was likely to come through cost efficiencies, value-added products and better product mix. This was also not visible. Ebitda margins, in fact, contracted to 12.7% as against 18.3% in a year ago.

To be sure, Hindalco’s overseas unit has seen a decent pickup in business. Shipments at Novelis Inc. rose 4% year-on-year. The 6% revenue fall due to a decrease in base aluminium prices was partially offset by higher shipments and a better product mix. That did perk up its US unit’s Ebitda by 11%.

Nevertheless, it is the local business that has been bogged down by the liquidity crunch and general slowdown. So much so, that Hindalco’s stand-alone business, including Utkal Alumina, saw its net profit drop by a whopping 77%.

Analysts say that incremental growth for the company is not visible, with imports hurting the domestic business. A volume pickup is crucial for the company, going forward. However, given the slowdown in the auto sector, that appears difficult. A pickup in international aluminium prices is also needed, but with worries of a looming global slowdown, by how much prices rise remains to be seen. A sharper focus on cost-control and improving product mix is needed, or Hindalco’s stock price might continue to meander for now.