Highlights - Lower global aluminium prices hit revenue and profitability - Novelis strong show supports overall growth - Domestic business of aluminium and copper hit by lower realisation and poor demand - Valuation offers little room for comfort in a challenging environment
Global growth worries are giving Hindalco Industries (CMP: Rs 196, Market cap: Rs 44,067 crore) a hard time. In 2019, the global consumption of aluminium, its major revenue earner, dropped 1 percent year-on-year (YoY). That’s the lowest level since the global financial crisis in 2008-09.
Its key markets such as Europe, China and India all scrambled to find their feet. Take this. China’s GDP growth dropped to a 29-year low and the IMF (International Monetary Fund) has already signalled a grave risk to global growth posed by Coronovirus, which is likely to take a heavy toll on China’s economy.
To give you a perspective, Hindalco Industries, including its international subsidiary Novelis, earns close to 85 percent of its revenue from aluminium.
Aluminium business: Bearing the brunt
The company’s December quarter results are a reflection of these worries. Revenues fell 12 percent and consolidated profit after tax declined 24 percent YoY. Across segments and businesses, the results were influenced by lower volumes and falling realisation.
During the quarter under review, global aluminium prices dropped by as much as 11 percent averaging Rs 1,754 a tonne. And the biggest impact was seen on its domestic aluminium business, which accounts for 19 percent of its revenues.
Despite a marginal 1.5 percent uptick in sales volume, the aluminium business revenue registered a 9.2 percent drop on a YoY basis during the December quarter . Further, as a result of lower realisation, its EBITDA contracted 17.3 percent to Rs 1,036 crore.
Novelis: Supports overall business
As against Hindalco’s domestic aluminium operations, Novelis kept its volumes at almost the same level. It too suffered from the soft aluminium prices globally, which pulled down revenues by 10 percent YoY. The company’s operating performance was better on the back of lower cost and product portfolio optimisation.
The drop in overall revenue came as no deterrent for Novelis, which was able to grow its EBITDA per tonne by 7 percent to $430 a tonne. Importantly, since Novelis accounts for close to 65 percent of the consolidated revenues, its strong show helped cover the poor operating performance of the copper and domestic aluminium businesses.
Notably, domestic aluminium EBITDA dropped 17.3 percent, which was compounded by a sharp 48 percent YoY fall in copper EBITDA at Rs 256 crore.
Copper: Under huge pressure
The copper segment was the worst hit because of the slowdown in the domestic economy and lower international prices. It saw a steep 15.2 percent decline in volumes to 84,000 tonnes. This, along with the correction in international prices, added to its cup of woes, resulting in 20 percent drop in copper revenue.
This also had an impact on profitability, because of which EBITDA dropped by 49 percent from a year ago. However, the overall impact was lower, considering that copper accounts for only about 16 percent of the total consolidated revenues of the company. Also, a large part of its drop in profitability was compensated by the good operating performance by Novelis.
Valuation and outlook
The December quarter proved to be a tough nut to crack for Hindalco. It's not out of the woods yet, considering a low pricing environment. International aluminium prices are hovering at $1,675 a tonne as against an average of $1,754 in October-December. A marked drop in consumption globally as well as locally, an offshoot of the lingering economic slowdown, and other worries such as Coronavirus and trade issues still persist, the impact of which could pan out in coming months.
Similarly, LME copper prices, which averaged at $5,874 a tonne in Q3 FY20, are trading at the $5,695 level. China produced 9.5 million tonnes of copper and consumed 11.8 million tonnes in 2019. If the Chinese demand takes a hit and other global headwinds remain, then there is very little head room for growth at least in the near term. The domestic copper market is even more fragile. For instance, the December quarter sales of domestic copper came off by 17 percent whereas imports grew 30 percent YoY.
The advantage with Hindalco is it's one of the low-cost producers of aluminium in the world and Novelis operations have started to stabilise. That apart, the overall group debt is under control. The company’s net debt to equity stood at 0.7 times in 2018-19 and its Q3 FY20 EBITDA was close to 4 times the interest cost.
The integration of the recently acquired Aleris, the US-based aluminium product major, is critical. However, the company is still waiting for approvals from its key markets such as China, the US and Europe.
For a visible recovery to take hold, the global aluminium demand and the pricing outlook need to improve. Coming to valuation, at the current market price of Rs 194 a share, it is trading 9 times its FY21 estimated earnings, which is on a higher side and offers little room for comfort, considering the existing bottlenecks.
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