Rupee appreciation impacts margins

Hindalco Industries Ltd. (HIL) reported steady growth in net revenue during Q1FY08. While higher volumes, both in copper as well as aluminium business led to 9.5% YoY growth in net sales, operating profit margin was impacted due to drop in alumina prices, coupled with rupee appreciation impacting aluminium realisations.

At the current price, HIL is trading at a P/E of 8.6x FY08E. While capex led volume growth will continue going forward, we expect rupee appreciation to have a bearing on average realisations going forward. This apart, expected softening in copper TC/RC margin will have a further bearing on the company’s performance. On consolidated basis, increase in interest burden and marginal profitability of Novelis will lead to a decline in next year’s consolidated EPS. However, following the sharp decline in stock price post the acquisition, we believe the same has been factored in the stock price. Hence, we maintain ‘Accumulate’ rating on the stock.

Key highlights of Q1FY08 results:

High aluminium volumes drive revenue in this business; appreciating rupee is the dampener:

HIL registered 9.5% YoY growth in net sales during Q1FY08. While revenue from the aluminium division was higher by 6.03% YoY, copper division revenue grew by 11.6%. Growth in the aluminium division was driven by an increase in volume. While alumina sales volume was up 11.8% YoY, primary metal sales were up 8.9%. Rolled products too witnessed 9% YoY increase during the quarter.

However, the benefits of volume growth were offset by rupee appreciation and correction in alumina prices. Despite 4% increase in LME aluminium prices, in rupee terms, average aluminium prices were lower by 6%. This was due to a 9.1% appreciation in rupee against the dollar, coupled with a reduction in customs duty on aluminium from 7.7% to 5.7%. On the other hand, spot alumina prices too were lower by 36% YoY at US$352 per tonne. These factors had a bearing on the EBIT margin of the company’s aluminium division, which declined from 43.1% in Q1FY07 to 36.6% in Q1FY08.

Valuation:

At the current price, HIL is trading at a P/E of 8.6x FY08E. While capex led volume growth will continue going forward, we expect rupee appreciation to have a bearing on average realisations going forward. This apart, expected softening in copper TC/RC margin will have a further bearing on the company’s performance. On consolidated basis, increase in interest burden and marginal profitability of Novelis will lead to a decline in next year’s consolidated EPS. However, following the sharp decline in stock price post the acquisition, we believe the same has been factored in the stock price. Hence, we maintain ‘Accumulate’ rating on the stock.