Hindalco’s profit growth likely to continue

ET Intelligence Group: Sharp declines in interest outgo and improving cash flows have combined to ensure enhanced financial performance at Hindalco, lending credibility to the sustained management efforts at deleveraging India’s biggest maker of aluminum.

The highlight of the March quarter earnings was lower interest outgo, or a decline of 8 per cent quarter on quarter, as Hindalco repaid a part of its debt. Net sales and net profit at Rs 11,747 crore and Rs 502.5 crore, respectively, were slightly higher than consensus estimates: The EBIDTA, at Rs 1,570 crore, was also marginally higher than what was penciled in by analysts.

In addition to improving cash flows on the back of rising aluminium and copper prices, Hindalco’s qualified institutional placement (QIP) and a strategic divestment of Aditya Birla Mineral, Australia, helped reduce Hindalco’s debt by Rs 5,536 crore since the beginning of FY17. Furthermore, it refinanced its Rs 28,000 crore debt, helping save more than Rs 500 crore in annual interest.



The company has said that its US subsidiary Novelis also entered into an agreement with Kobe steel to sell 50 per cent in its South Korea facility. In a post-earnings call, the Hindalco management confirmed that the company would deleverage its balance sheet further, while incurring minimal capital expenditure. It would be doing only small investments to enhance the output of value-added aluminium and copper.

Operationally, aluminium contributed nearly two-thirds to EBIDTA, with copper the remaining third. Aluminium metal production volume rose 3 per cent year on year and production volumes of value added aluminium products by 6 per cent, thus helping EBIDTA from aluminium increase 10 per cent to Rs 918 crore.

Globally, aluminium prices are rising. Average LME aluminium prices for the first two months of the current quarter is $1940 per tone, compared with the average price of $1,855 per tonne for the March quarter. Copper prices are trending downward, with average LME rates falling 5 per cent from average March quarter prices.

However, this may have limited impact as most revenue in copper comes from value added products. With improving cash flows and lower interest costs, Hindalco’s profit may continue improving in the coming quarters. Hindalco’s stock closed at Rs 203.7, 1.2 per cent higher on Tuesday, and is trading at 7.5 times EV/EBIDTA