Edelweiss Research: Hindalco Industries

Subsidiaries led by Novelis steered turnaround

n Hindalco reported EBIDTA of INR 97.5 bn (FY09 29.7 bn), of which, subsidiaries contributed INR 68.0 bn [FY09 INR (0.7) bn].

Unrealised derivative gains supported improved operations

n Unrealised derivative gains for FY10 stood at INR 27.0 bn (43.7% of PBT), primarily on account of reversal of derivative losses incurred by Novelis (INR 23.8 bn) during FY09.

n Hindalco, on a standalone basis, was not providing for MTM losses on derivative contracts till FY09. During FY10, Hindalco’s standalone entity early adopted AS 30 and adjusted the net loss of INR 2.3 bn (net of deferred tax of INR 1.2 bn) arising from fair valuation of outstanding derivatives as at FY09 end against general reserve. INR 1.8 bn of derivative gains for FY10 have been routed through the P&L.


Derivative driven profit variability likely to reduce

n Derivatives in Novelis, which caused huge losses in FY09, were primarily taken to hedge the customer fixed price contracts. Last of such contracts expired on CY09 end. The new agreement does not contain such metal price ceiling. Going forward, variability in profitability on account of derivative will not be substantial.


High court approvals keep interest expenses off P&L

n Interest and finance charges of INR 3.0 bn (7.6% of PAT) incurred on loans taken for Novelis acquisition, have been charged to the business reconstruction reserve (BRR). BRR had been formed in FY09 by seeking a court approval for transferring the balance in share premium account to BRR.


Inadequate provisioning for copper purchase in FY09 hits profitability

n Raw material consumed for copper business during FY10 includes INR 2.6 bn (4.2% PBT) of additional liability for copper concentrate purchased during FY09 for which price and quantity was not finalised in earlier years. The company has made a fresh provision of INR 1.1 bn for FY10 for similar contracts.


Loan book reduction primarily on account of exchange gain

n During FY10, Hindalco’s loan book reduced by 43.1 bn, to INR 240 bn (FY90 INR 283.1 bn), primarily on account of exchange fluctuation. Net loan repaid as per cash flow stands at INR 3.2 bn.



Healthy operating cash flows and QIP facilitate capex

n Cash from operation post interest paid stood at INR 32.5 bn, which has been utilised to finance the capex and increased working capital requirements

n The company is pursuing aggressive capex plans. Net cash outflow for capex during FY10 stood at INR 41.7 bn (FY09 INR 25.9 bn)

n Interest capitalised for FY10 stood at INR 3.4 bn (FY09 INR 3.3 bn)

Other financial highlights

n Un-reconciled decrease in securities premium account of INR 1.7 bn observed in FY10

n Book value per share of the company on a consolidated basis stood at INR 112.5 Vis a vis INR 145.8 on a standalone basis primarily on account of losses incurred in Novelis charged to BRR.

n Inventory has increased 32.4% from INR 85.2 bn in FY09 to INR 112.8 bn in FY10 primarily on account of increase in base metal prices.

n Goodwill of INR 44.3 bn and customer relationship of INR 17.8 bn constituted 28.8% of the net worth.