Strong prospects for Hindalco

After a robust show by its US subsidiary Novelis, Hindalco's standalone performance too was impressive. The June quarter had posed some challenges in terms of correction in base metal prices on a sequential basis and also goods and services tax-led destocking. The company beat consensus estimates on revenues and operating profits levels despite these negatives.

Average copper prices at about $5,662 a tonne on the London Metal Exchange (LME) was 3 per cent down sequentiaIly. Aluminium prices per tonne remained volatile in the range $1,960-1,855 during the quarter and have shot up to $2,040 levels in August. Thus, while some softness in performance on a sequential basis is understandable, on a year-on-year (y-o-y) basis higher LME prices for both metaIs (up 20-21 per cent) and rising volumes helped.

HindaIco produced four per cent more aluminium and two per cent more alumina on a y-o-y basis. Copper had seen capacity shutdown in June 2016 quarter resulting in 67 per cent y-o-y increase in cathode production and 51 per cent increase in revenues to Rs.5,403 crore, while aluminium revenue grew nine percent to Rs.5,008 crore.

All this led to a 27 per cent increase in revenues to Rs.10,663 crore. Copper contributes about 38 per cent to earnings before interest, tax, depreciation and amortisation (Ebitda). Aluminium too saw comparable Ebitda despite a 47 per cent increase in raw material costs. Nevertheless, overall Ebitda grew four per cent to Rs.1,404 crore beating consensus estimates of Rs.1,245 crore.

The net profit missing estimates may appear disappointing, it was impacted by one-off provisioning. The company has made provisions of Rs.104 crore following recent Supreme Court judgment in a matter pertaining to mining regulations. This led to lower y-o-y net profit at Rs.290 crore vs consensus estimates of Rs.389 crore.

With major upstream capacity expansions being completed and volumes showing growth, profitability is expected to get a further boost from firm base metal prices. The company also prepaid Rs.5,399 crore of debt so far in FY18 at the standalone level.

With cost of production for aluminium improving, new coal linkage of 2.9 million tonne bode well. Hindalco sources 35 per cent of its coal needs (about 5.5 million tonne) through e-auction and potential coal linkage wins at a discount to e-auction prices during upcoming coal linkage auctions may lower production cost. On aluminium prices, analysts at Motilal Oswal Securities had already revised LME aluminium from $1,700 a tonne to $1,846 a tonne and $1,825 a tonne for FY18 and FY19, respectively in July. The prices have shot up further in August following news of possible Chinese capacity cuts. Even if this is not implemented, costs at Chinese smelters have increased by $90 a tonne from recent lows which should support downside risks to aluminium prices say, analysts at Jefferies.

Thus a correction in stock prices offers investors an opportunity. The stock closed seven per cent lower at Rs.222 levels on Friday due to the nervousness in the market on account of geopolitical issues.