Strengthening, cost control in Hindalco

The rise in realizations of aluminum and alumina was on the back of decline in Hindalco’s earnings due to higher base metal prices. What’s more, cost control has been added to the company’s operational flexibility.

Hindalco’s domestic revenue grew 83 per cent year-on-year and 30 per cent sequentially. EBITDA, or earnings before interest, taxes, depreciation and amortization, grew 152% annually and 38% sequentially 3,602 crore. This was much higher than analysts’ expectations. As total costs increased only 5% sequentially, operating performance outperformed estimates.

Everything was working for this in the aluminum segment. Favorable macros, improved product mix and higher volumes all resulted in a decade-high Ebitda margin from the segment, with EBITDA increasing 173% annually.

Of course, the jump in global metal prices has been a major contributing factor. Analysts say average aluminum prices on the London Metal Exchange (LME) rose 58% year-on-year and 10% sequentially to $2,645 a tonne during the quarter. Hindalco was further helped by a 12% increase in aluminum metal sales. The share of value-added products (VAPs) rose to 25% from 21% a year ago, benefiting earnings. Sales of aluminum VAPs (excluding wire rods) also grew by 36 per cent year-on-year, driven by a sharp recovery in the domestic market.

To be sure, Hindalco had to deal with rising cost of coal and petroleum products, which put pressure on margins. By using captive mines and efficient management of coal supply, Hindalco has been able to prevent cost escalation. That said, management expects costs to rise 8% in the December quarter.

Copper TcRc margins (treatment and refining charges), however, remain weak. However, the company’s operations remain stable and copper production is expected to maintain a quarterly run rate of over 10,000 tonnes as seen in Q2. Was on Ebitda for business 352 crore in the September quarter, a growth of 45% over a year ago, helped by higher volumes, better operating efficiencies and better by-product realization.

Hindalco’s outlook remains bullish as global metal prices do not see a turnaround anytime soon. Analysts are considering aluminum prices to remain at current levels or move further, which bodes well for the company. Given that demand may exceed supply, realizations are expected to remain strong.

Another positive is the continued ramp-up of downstream production. Hindalco recently completed expansion projects at Utkal Alumina totaling 500,000 tonnes, taking the annual capacity to 2.1 million tonnes. Alumina prices are on the rise, climbing 14.5% sequentially to $317/ton in Q2. With sufficient alumina capabilities, the company can also boost external sales for alumina.

Meanwhile, Hindalco’s consolidated performance was led by its US arm Novelis. Novelis accounts for more than half of Hindalco’s operating profit. The company reported a 22% increase in adjusted EBITDA during the second quarter. Being a converter, its performance remains untouched by LME aluminum instability. It is currently benefiting from the demand for strong beverage cans and packaging products. Although automakers’ demand for auto sheets has been impacted by global chip shortages, it is expected to bounce back during the second half of the year. Novelis’s adjusted EBITDA per tonne rose 16% to $571 on higher volumes and a favorable product mix.

In a November 3 note following the Novelis results, analysts at JM Financial said the outlook remains positive across sectors with favorable demand trends in the markets.

“Hindalco’s focus on downstream expansion along with backward integration will to some extent offset any cost escalation,” analysts at Centrum Stock Broking said after the earnings release. The brokerage has increased its EBITDA estimates for consolidated FY22 and FY23 by 9% and 5%, respectively.