Hindalco: Soft results but a firm outlook

Steady aluminium prices, declining debt to aid profit growth; any fall in stock price could be a good entry point, say analysts

After a strong show by US subsidiary Novelis and looking at firm aluminium prices during the March quarter (the fourth one or Q4 of 2017-18), expectations on Hindalco’s domestic performance were high. The stock had gained seven per cent in the past fortnight.

So, a lower than expected performance saw the share price fall 2.3 per cent intra-day, before closing 1.3 per cent lower at ~240 on Wednesday. For the full year, however, Hindalco’s performance was strong. Moreover, its prospects remain good, say analysts; so, any fall in the stock could be a good entry point.

The quarter saw aluminium prices rise 21 per cent year-on-year on the London Metal Exchange (LME). However, the benefits were restricted due to rising costs and as Hindalco hedged part of its output at a pre-determined price. The shutdown at a phosphoric acid plant also impacted volumes at its copper division; withe treatment and refining charges (Tc/Rc) trending down (annual benchmark declined 11 per cent), the segment’s profit fell short of analyst estimates. The segment, 53 per cent of overall revenue, saw operating profit decline about a third over a year, to nearly ~3.3 bn in Q4.

The aluminium segment with 11.5 per cent improvement in operating profit at ~12.65 bn helped drive overall operating profit to ~18.1 bn, higher than the ~17.9 bn in the yearago quarter. Overall, for the standalone business, even as revenue at ~116.8 bn was ahead of the ~113.5 bn analysts’ consensus estimate as indicated by Bloomberg, net profit at nearly ~3.8 bn was short of the consensus estimate of ~4.75 bn.

Strong outlook

Even so, the prospects remain firm. The LME price outlook for aluminium is firm and cost pressure in the business is reducing. The management says April onward it has seen a flattening of input costs, growing through FY18 (double-digit percentage from Q1 to Q4). Further, while FY18 had seen about 50 per cent of its aluminium hedged at $2,100 a tonne, the company has reduced this to 35 per cent. Currently, while 28 per cent is hedged at $2,100 a tonne levels, 7-8 per cent is hedged at higher levels of $2,275-2,300 a tonne).

The copper segment, too, will see volume growth returning to normal levels as its plant resumes operations after a maintenance shutdown. Though Tc/Rc remains soft, higher acid prices and DAP (di-ammonium phosphate) realisation should mitigate some of this.

Notably, Novelis’ record profitability in Q4 has allayed concern on these being impacted by the ongoing tariff war between the US and other countries. Analysts add that an improving mix in favour of automotive products, higher volumes and the end of margin pressure in beverage can pricing will drive operating performance. Novelis is mainly a convertor of aluminium into value-added products such as beverage cans, automobile components and the like.

Meanwhile, FY18 saw Hindalco deliver significant improvement in its overall performance. Highestever aluminium and copper production, well complemented by Novelis, had helped; improving aluminium realisations added. Hindalco has been able to reduce its debt by about ~80 bn in the India business, taking the ratio of net debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) to 2.67. With Novelis seeing 12 per cent improvement in cash flow, the US business reduced its net debt to Ebitda to 3, from 3.9 in FY17.

Thus, Hindalco’s consolidated net debt to Ebitda stood reduced at 2.82. The company is comfortable at a ratio of 2.5-3. Satish Pai, managing director, says the company will now be using cash flow to grow the business. The ongoing downstream expansions should help drive 10-12 per cent volume growth in FY19 and every following year will see some benefit from this, he added.

The new continuous cast rod plant in the copper business was commissioned in Q4. Work on Utkal’s aluminium capacity expansion by 500,000 tonnes has commenced (to be completed in 30 months, with a capital outlay of ~13 billion). To enrich its product mix, the company is evaluating investment in aluminium downstream facilities, too. Novelis is setting up a 200,000-tonne automotive finishing facility at Kentucky, US. All this will drive growth further.