Novelis reported slower revenue growth, but made it up through improved operating metrics, thanks to a better product mix
Novelis reported slower revenue growth, but made it up through improved operating metrics, thanks to a better product mix

Dull Q3 for Hindalco gets a lift from Novelis, but investors still on the fence

  • Stand-alone revenues fell 14% year-on-year. Net profit plunged 64% from the year-earlier period
  • While some of Hindalco’s cost-reduction efforts are bearing fruit, domestic economic conditions are not seeing any major improvement in demand

Hindalco Industries Ltd’s investors have been waiting for an improvement in its operations for over two years now, but there are no signs of a revival yet. Despite a shift towards value-added products in the mix, the company’s third quarter (Q3) consolidated net profit slumped by nearly 24% year-on-year.

A slowing global economy meant aluminium prices and demand for products have been soft. The muted trend in earnings is reflected in the Hindalco stock, which is down about 20% in the past two years.

Had it not been for overseas subsidiary Novelis’s better Q3 operating metrics, the company would have taken a bigger hit on profitability. Stand-alone revenues fell 14% year-on-year. Higher costs have dragged down operating efficiencies. The company’s stand-alone net profit plunged 64% from the year-earlier period.

But Novelis managed to stem the damage to an extent. The firm reported slower revenue growth, but made it up through improved operating metrics, thanks to a better product mix. A contribution of higher value-added products meant that its Ebitda (earnings before interest, tax, depreciation and amortization) of $343 million in Q3 FY20 grew 7% y-o-y.

Novelis registered higher beverage can sheet shipments on account of strong global demand. Besides, automotive body sheets were also in good demand.

(Graphic: Satish Kumar/Mint)
(Graphic: Satish Kumar/Mint)

While some of Hindalco’s cost- reduction efforts are bearing fruit, domestic economic conditions are not seeing any major improvement in demand. In fact, Q3 saw a big contraction of 14% in domestic consumption, compared with a 0.1% growth in the first half of FY20.

Nevertheless, Hindalco’s Muri alumina plant in Jharkhand has restarted operations in December, which should help it report improved Q4 earnings.

But it seems Hindalco may need a big recovery in global demand and prices of aluminium. That will be a tad difficult because global demand outlook remains muted. In 2019, world consumption fell 1%, the most since the global financial crisis.

It should be noted that the coronavirus outbreak may keep prices of aluminium soft in the coming quarters, as China remains an influential player in the commodity space. Global aluminium prices also witnessed a decline of 11% y-o-y in Q3.

Still, some analysts hope that if all goes well, Hindalco’s earnings would be on a much better footing. “Cost competitiveness in Hindalco’s India operations driven by increased coal security, the quick ramp-up of new capacities and high margins at Novelis/Aleris with a higher proportion of automotive products in the mix continues to drive an upward earnings trajectory for the consolidated entity," analysts at JM Financial Institutional Securities Ltd said in a recent note to clients.

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