On the face of it, the March quarter results of Hindalco Industries Ltd look decent. Revenues at the stand-alone firm, including Utkal Alumina, rose 4.3% sequentially despite a notable drop in product prices.

(Naveen Kumar Saini/Mint)

Even the drop of 10% in operating profit was lower than expected. However, the performance looks weaker if looked at more closely. Much of the boost in the operating income came from a spurt in other income, which jumped 79% sequentially. Exclude this and sequential operating profit will fall 20%, which is not materially better than Street estimates.

Revenues at the aluminium unit dropped just 1% despite a notable fall in aluminium prices. This is because of the benefits of business hedges—a portion of volumes were pre-booked at higher prices. However, this yielded no major benefit. Operating profits dropped 18.9% sequentially. Low realizations and adverse currency movement impacted operating profit, according to the company. However, analysts also blame higher operating costs for the steep fall in operating profits.

The performance in the copper business, on the other hand, was impacted by lower production and treatment and refining charges. As a result, operating profit dropped 26.9% sequentially. The management expects output at the copper division to be impacted because of plant shutdowns in Q1, but it expects production to scale up in the rest of the fiscal year, making up for the loss.

Importantly, the management sees incrementally lower costs at the aluminium business. Coal availability is better than a year ago and prices in the global and domestic spot markets are softer. The global aluminium market is expected to be in deficit (production versus demand) this year, sending inventories to a multi-year low. Global demand for refined copper is estimated to rise 2% in 2019, with demand for copper concentrate outstripping production.

However, uncertainty in the global economy and trade tensions are an overhang over metals producers. Aluminium prices on the London Metal Exchange are down 2.3% over the past month.

The company, meanwhile, is strengthening its balance sheet. Consolidated net debt to Ebitda (earnings before interest, tax, depreciation and amortization) eased to 2.48 times as it prepaid some loans. The US unit Novelis reported better-than-expected results for the March quarter, tracking demand traction in user industries. However, the performance did not count for much as far as the Hindalco stock goes, as trade tensions between the US and China overshadowed investor sentiments.

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