Hindalco: Hold/Avoid fresh exposures

Recommendation: Hold/Avoid fresh exposures

B. Krishnakumar

IN THE backrop of the steep fall in the international prices of aluminium and a challenging external environment, Hindalco has recorded a modest revenue growth for the second quarter ended September 30.

Despite a sharp focus on a high value-added product mix and improved operational efficiencies, Hindalco's net revenues grew 1.2 per cent to Rs 557.30 crore.

The slowdown in revenue growth is attributed mainly to the 40.09 per cent decline in export volumes by which was barely offset by the 8.2 per cent rise in domestic volumes. While Hindalco's realisations improved 3.3 per cent, the overall business volumes fell 2.1 per cent (to 60,070 tonnes from 61,357 tonnes) in the 2001-02 second quarter over the corresponding previous period.

The combined sales volume of value-added products -- rolled products, extrusions and foils -- were up 5.6 per cent, resulting in a 11.1 per cent improvement in total sales.

The operating profits fell 4.3 per cent to Rs 253.40 crore because of a 6.2 per cent rise in operating expenditure. The increase in the operating expenditure was attributed mainly to higher prices of caustic soda, calcined petroleum coke and bauxite and higher power costs.

This led to a decline in the operating profit margin by 2.59 percentage points to 45.47 per cent; the drop was averted, to some extent, by improved realisations and better product mix in the second quarter of 2001-02 over the previous period.

Despite a surge in the `other income' component and a decline in interest costs, the post-tax earnings dipped 0.42 per cent to Rs 167.10 crore. On the equity base of Rs 74.50 crore, the per share earnings (non-annualised) works out to Rs 22.43.

Though Hindalco's growth record was disappointing in 2001-02 second quarter, its production record along the entire aluminium chain -- from alumina, ingot, wire rods to high value-added products -- remained fairly strong.

Hindalco maintained the smelter capacity utilisation above 100 per cent, recorded healthy production growth of wire rods rolled products and foils. However, because of weak demand for extrusions, their production in the 2001-02 second quarter was scaled down by 18.50 per cent over the previous period.

Growth outlook: The external environment for the aluminium industry continues to remain challenging, with a sharp drop in global consumption and weak international prices. The aluminium prices have been steadily declining at the London Metal Exchange since May 2001 shedding 16.7 per cent since then and October.

As the recovery of the American and European markets hold the key to the rise in global demand, the prospects of demand recovery before the second half of calendar year 2002 appear fairly bleak. The sluggish global demand had had a negative influence on international prices of aluminium, which have weakened further in the first half of November. But prices are likely to stabilise with limited downside from these levels.

The picture is no brighter On the domestic front. Indications are that exports will continue to suffer. And the domestic demand may remain sluggish as the demand from end-user segments are expected to be weak in the foreseeable future.

Besides, in line with declining international prices, the domestic prices of ingots/wirerods have also been revised downwards by 4 per cent with effect from October 1. This may affect Hindalco's realisations in the third quarter.

The only ray of hope for volume growth appears to be the commissioning of a 33,000-tonne new potline in September 2001 as part of Hindalco's brownfield expansion project. As its metal capacity utilisation has already touched 100 per cent, the additional metal production of 12,000 tonnes from this new potline over the next two quarters may offer some room for additional volume growth (although realisations will continue to remain under pressure).

Given the relatively weak fundamentals for aluminium and the sluggish demand prospects (at least over the next quarter or so), investors may avoid fresh exposures in the Hindalco stock till the announcement of the earnings performance for 2001-02 third quarter.

However, considering the buoyant long-term growth prospects, high value-added product profile and strong cashflows to tide over this difficult phase, shareholders may remain invested for decent capital appreciation in the medium term.