Home >Markets >Mark To Market >Hindalco’s margins bounce back, but low asset sale prices play spoilsport

Metal companies are regaining some of their lost lustre after the pandemic. Aditya Birla’s flagship company Hindalco Ltd’s Q2 margins showed a good jump over the year-ago quarter thanks to lower costs and a better product mix. But the sale of Aleris’ aluminium sheets operations in Lewisport at a lower-than-expected price played spoilsport with the stock’s returns, which slid about 1.4% on Tuesday.

Still, the Q2 numbers were encouraging with consolidated revenues a step ahead of the Street’s estimates. In the domestic market, Hindalco’s revenues were a tad slow due to lower aluminium sales. Analysts were expecting higher aluminium sales volumes of about 315 kilotonnes, but it came in at 303 kilotonnes. Furthermore, the cost of production inched up marginally.

Nevertheless, standalone Ebitda expanded quite well at 25% due to better operating leverage. Ebitda is earnings before interest, tax, depreciation and amortization.

Gaining lustre
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Gaining lustre

Hindalco’s overseas subsidiary Novelis has also not been behind in the recovery, and could remain a growth driver in the coming quarters. Novelis’ adjusted Ebitda expanded 23% y-o-y, thanks to lower costs and better realizations. Auto demand has been strong in the US, besides the beverage can business is showing good resilience with takeaway consumption on the rise. Demand for high-end products has also picked up, but for the aerospace segment which remains muted.

However, the Street was disappointed with the realizations from Aleris’ Lewisport unit at a much lower price than what it had anticipated. The unit sale was for about $171 million. Even the sale of the Duffel plant at a lower-than-expected price seems to have made the Novelis acquisition look a tad expensive. Analysts were expecting both the units to fetch about $800 million.

“The Lewisport unit could generate an Ebitda of $80-100 million due to its auto finishing capacity and would have driven synergies. Both Duffel and Lewisport divestment prices are low, and has resulted in overall Aleris acquisition turning out to be an expensive one for Hindalco," said Siddharth Gadekar, an analyst at Equirus Securities.

Nevertheless, the overall business continued to pick up pace. Analysts said that demand for aluminium and copper products could sustain in the coming quarters due to a revival in autos, besides global demand. Global aluminium prices increased to over pre-covid highs, and demand remains good.

It is also the key reason for the stock to show a good post-lockdown recovery. The stock is 13% away from its pre-covid highs seen in January. Even so, the sharp run-up has stretched the stock’s valuations at a forward price-to-earnings multiple of 13 times FY21 earnings.

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