Shares of Hindalco Industries Ltd have done fairly well amid concerns about the global economy and the fall in commodity prices. Compared to an 18% drop in the Nifty Metal index, the company’s shares fell 10% in the past six months. The impact of the fall in aluminium prices and input cost pressures can be seen in the December quarter results (Q3 results). But thanks to better realizations, Hindalco managed to deliver steady earnings.

Revenue of domestic operations including Utkal Alumina, its aluminium refining unit, rose 8% from a year ago. Operating profit is up 4%. Thanks to prepayment and repricing of loans, finance costs dropped 12%. This helped the company report a 10% rise in profit before tax.

Thanks to beter realizations and product mix, Hindalco Industries has reported a decent growth in operating earnings.
Thanks to beter realizations and product mix, Hindalco Industries has reported a decent growth in operating earnings. (Vipul Sharma/Mint)

The growth figures may not look exciting on absolute basis but seen in the backdrop of a 6% fall in international aluminium prices and elevated input costs, the earnings performance is decent.

The pressure from moderation in aluminium prices can be seen on a sequential basis. Operating profit at the aluminium segment dropped 4.7% from the September quarter. But thanks to better volumes and realizations in the copper business, Hindalco (stand-alone plus Utkal Alumina) managed to maintain the operating profit at the September-quarter level.

With coal availability improving and crude oil-based raw material prices easing, the management expects the input cost base to either remain flat or moderate in the current quarter.

Further, with the US-based subsidiary Novelis Inc. seeing decent growth (operating profit up 5.6%), Hindalco should see another steady quarter (Q4 FY19), unless the global economic situation turns for the worse. “Cost competitiveness in Hindalco’s India operations driven by increased coal security, quick ramp-up of new capacities and high margins at Novelis/Aleris with 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 5 February note. Novelis is acquiring Aleris Corp., and the acquisition is expected to be completed in the second half of this year.

The commentary and the performance in the December quarter should help the stock. However, the key for Hindalco and the industry remains aluminium prices. At current prices, production at around half of the global capacities (outside China) is unviable, says the company’s management. While this should reduce the scope for a steep fall in aluminium prices, much depends on how China’s economy shapes up.

The demand slowdown in China is driving cheap imports into India. This is not only weighing on prices but is also impacting the market shares of local producers such as Hindalco. The company expects some of the recent stimulus measures to help improve demand in China, and ease the pressure from imports. But how effective these measures are in supporting demand in China remains a question mark.