Hindalco financially stable now

Aluminium maker Hindalco Industries Ltd’s shares fell about 1.5% on Tuesday, performing better than the broader market, which was down 2.3%. The company announced stand-alone and consolidated results for the quarter ended March, both of which were broadly in line with the markets’ expectations. Hindalco’s stand-alone revenue fell by 25% to Rs3,772 crore in the fourth quarter, owing to a sharp drop in aluminium prices. Operating profit fell about 60% year-on-year to Rs314 crore. The management of Novelis Inc., the American unit of Hindalco, told analysts in a call that adjusted operating profit during the March quarter was about $54 million (Rs258.66 crore), significantly lower than the profit of $184 million reported a year ago. Novelis also reported negative free cash flow of $350 million, necessitating fresh short-term borrowings last year. But as the markets’ reaction to the results demonstrates, investors aren’t unduly worried about the performance, especially since things have stabilized. More importantly, Hindalco now seems to be in a much better financial position, which is evidenced from the fact that it has started placing equipment orders related to its capital expenditure plans. On Tuesday, it reiterated its plans to spend Rs25,000-30,000 crore until 2013 on capital expansion plans. By the time this expansion plan is complete, the company’s aluminium capacity will more than treble to 1.6 million tonnes. In a recent investment conference hosted by Citigroup Inc., the company disclosed that its cost of producing alumina will halve to $100/tonne, and the cost of producing aluminium will fall by about one-forth to $1,000/tonne. Hindalco’s management believes that demand for aluminium will outstrip supply in a few years and that its new capacities will be coming on stream in time. The near-term outlook, of course, is less sanguine considering that aluminium prices have remained soft. Prices have risen by only about 10% so far this year, compared with a much sharper rise in the prices of other non-ferrous metals. While this ensures that the downside risk is limited, the profit outlook for Hindalco’s stand-alone business will also be muted owing to the relatively low prices. The fact that inventories and production remain high means that any further recovery in prices may not be sharp. As far as Novelis goes, its saga related to can contracts with ceilings on the metal price will end this fiscal year. Some of the company’s contracts contained a ceiling over which metal prices could not be contractually passed through to certain customers. During the years ended 31 March 2009, 2008 and 2007, it was unable to pass through approximately $176 million, $230 million and $460 million, respectively, of metal purchase costs associated with sales under these contracts. These contracts now account for only 6% of sales and will expire in December. In any case, with aluminium prices being low, losses on these contracts are unlikely. However, since the metal price exposure has been hedged at higher levels of aluminium, cash losses worth $141 million will be booked this fiscal year. The major positive for the company is that it seems to be in a comfortable financial position, with Novelis being able to manage its own cash requirements. Besides, Hindalco has cash worth Rs5,000 crore, which gives it reasonable flexibility for its own capex plans. It’s not surprising, then, that the company’s shares have more than doubled from its lows in March this year. source:www.livemint.com