Hindalco profit up 15%, but outlook less positive

Hindalco Industries Ltd, the aluminium and copper flagship of the $12 billion (Rs49,200 crore) Aditya Birla group, beat market expectations and reported a 15% growth in net profit to Rs721.3 crore for the fourth quarter, as aluminium prices globally continued to remain firm.

Hindalco's shares gained 1.54% to close at Rs148.15 on the Bombay Stock Exchange on Friday, in contrast to the Sensex index, which fell 1.02%.

Sales rose 30% to Rs4,748.9 crore. Consolidated revenues for the fiscal year ended March grew 61% to Rs18,313 crore, while operating profits climbed to Rs4,385.1 crore, crossing the $1 billion mark for the first time. Net profits for the fiscal year grew 55% to Rs2,564.3 crore.

According to Debu Bhattacharya, managing director, Hindalco, the gap between growth in profits and sales is because of certain one-time costs that have been incurred by the company.

"These costs include some transaction fees that were related to the acquisition of Novelis among others," he said. Hindalco had said in February that it would acquire Novelis Inc, for $6 billion.

In comparison, Hindalco's competitor, Sterlite Industries (India) Ltd, reported a 23% growth in net profit to Rs1,718 crore and 51% increase in revenue to Rs6,252 crore for the fourth quarter, also ended March.

Strong aluminium prices on the London Metal Exchange and an improved product mix due to higher sales of value- added products helped Hindalco's aluminium business revenues rise 18% to Rs2,042.4 crore during the quarter. Copper business revenues grew by 40% to Rs2,711.2 crore.

However, the outlook for Hindalco is not very positive. The company is likely to see its margins come under pressure as the prices of aluminium and copper are likely to soften. With capacity utilization running at over 100% in aluminium, the possibility of earning more revenues by increasing output too is limited.

The company's copper business is facing a shortage of the key raw material copper ore as currently its captive mines cater to only 25% of its requirements. "There are no upsides for the future, neither on the price front nor on the volume front (in the short term)," said Giriraj Daga, research analyst at Mumbai brokerage Khandwala Securities Ltd.

Work on the 15 lakh tonnes per annum Utkal alumina project, in which Hindalco holds 55% stake, is under way. The project, a joint venture with Canadian aluminium major Alcan Inc, will now see either Hindalco buying out the stake or the entry of another joint venture partner.

"We have the right of first refusal. If we come to an agreement on the price, we will pick up Alcan's stake. We can also get in another partner," said Sunirmal Talukdar, Hindalco's president.

In the short-to-medium term, the Novelis buy will further reduce the scope for growth in the non-ferrous metals major's profits.

"There will be a few years of pain. But the picture after that will be worth it," Kumar Mangalam Birla, chairman, Aditya Birla Group, had said at the company's recent extraordinary general meeting.

According to Birla, Novelis will be EPS (earnings per share) accretive by 2009-2010. The company's EPS for the year, at Rs25.5, was up 52%. EPS is defined as the net profit or loss accruing to equity holders per outstanding share.