Hindalco an underperformer: Karvy

The company's Q1 FY 08 results are unimpressive with revenue growth of 9.5% YoY to Rs 46,779 million and adjusted Net profit growth of 0.2% YoY to Rs 6,029 million. EBIDTA margin was at 18.9% as compared to 21.8% YoY. Aluminium sales volume grew by 8.0% YoY to 1,07,441 ton, but average realization per ton of aluminium fell by 2.3% to Rs 1,40,914. Consequently, EBIT of aluminium division declined by 9.9% YoY to Rs 6,423 million. ROCE stood at 34.1% as against 42.8% in Q1FY07. Copper business showed a 14.8% YoY increase in EBIT to Rs 1,123 million. However, there was a 17.7% decline in EBIT on QoQ basis in line with the falling global treatment charges / refining charges. The division continues to have a low ROCE of 7.8%. Other income grew 60.6% YoY to Rs 1,246 million due to higher treasury gains and booking of carried forward gains on FMPs. Average tax rate for the company continues to be much lower at 25.6% than the corporate tax rate of 34.0% due to the proportionately higher tax exempt income. The acquisition of Novelis Inc., the world's leading producer of aluminium rolled products, was completed on 15th May 2007 through an indirect subsidiary incorporated in Canada. We expect the company to report the first quarterly consolidated numbers including Novelis by October 2007. However, since there is unlikely to be any major improvement in Novelis' performance in the near future, the consolidated results may not act as an upward trigger for the stock. For FY08, we expect the stand-alone revenue growth of 9.4% to Rs 200,421 million and adjusted profit to fall by 6.2% to Rs 24,063 million. We upgrade the stock from SELL to Under performer in view of the recent fall in stock price.