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Hindalco’s volumes to jump in FY15

LiveMint logoLiveMint 03-06-2014 Ravi Ananthanarayanan

Hindalco Industries Ltd is expected to push more metal out of its factories in the current fiscal year. It may seem a rather inopportune time to be producing more since domestic economic growth is weak. Gross domestic product rose by 4.6% in the fourth quarter of 2013-14, official data showed last week. Also, a strong rupee against the dollar can be a limiting factor in its performance.

While these external elements are concerns, some other factors are working in the company’s favour. A strong rupee and weak aluminium prices—down by 3.4% sequentially on the London Metal Exchange (LME)—were countered by higher metal premiums. Premiums are paid by buyers over the LME price to get timely deliveries. Hindalco said Japanese ingot premium rose by 24% sequentially. Its aluminium business did well in the March quarter, with revenues rising by 22.4% sequentially while profits nearly doubled.

The company’s copper business too should have benefited because of higher treatment and refining charges (TC/RCs), but lower prices of by-products were a dampener. Excess supply of copper concentrate has led to higher TC/RCs, benefiting companies such as Hindalco. Revenue at its copper division rose by 12.6% sequentially, but profit grew by a much slower 6.2%.

Novelis Inc., its international aluminium processing business, too did fine during the quarter, as shipments rose by 4% sequentially while its adjusted Ebitda rose by 23%. Ebitda refers to earnings before interest, tax, depreciation and amortization.

In 2014-15, Hindalco’s aluminium projects will play a bigger role in its performance. As with most large projects, they will take time to stabilize and the impact of capitalization of costs will be evident. In the March quarter, the company’s stand-alone operating profit rose by 31.2%, but a sharp increase in depreciation and interest costs led to its profit before tax (and before exceptional items) rising by only 9.9%. A critical factor will be the company’s ability to get captive coal supplies to support the increase in output, otherwise profits could get affected.

Hindalco’s share has run-up, as have all metal stocks, in anticipation that the new government at the Centre will take steps to reverse the slowdown in the investment cycle. This does set the stage for some volatility, especially if the government’s actions don’t match expectations.

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