Tough times ahead for Hindalco

Global uncertainties have impacted the prices of aluminium and copper in the international markets.

While the fall in London Metal Exchange (LME) prices has not hit India's largest aluminium producer, Hindalco, significantly in the second quarter, the second half of the financial year could be challenging.

Aluminium prices on LME averaged $2,399 in the second quarter, down eight per cent from the previous quarter, the company explains.

"Even as the large metal inventory has remained locked in financing deals, taking benefit of the low interest rates, LME has come under further pressure in the current quarter given the macro developments," says a company statement.

It's apparent that even as the cost of production has not declined, realisations have been lower than previous quarters.

According to the median estimate of 17 analysts surveyed by Bloomberg, aluminium prices will trade at $2,000-$2,350 in the next six months.

In that case, there will be further pressure on the earnings of companies like Hindalco. Bloomberg Industries estimates that 25 per cent of production loses money below $2,350 and 50 per cent under $2,000.

If aluminium is likely to come under stress, it's no different for copper. The company has highlighted that the domestic refined copper market has also shown weakness in segments like wires and cables, automobiles and white goods.

In the last quarter, growth in global refined copper slowed to lower single digits. To make matters worse, copper prices have also declined on LME, though Hindalco has not been hit by this in the quarter.

However, the difficult global environment is visible in Hindalco's numbers. The company's revenues clocked a year-on-year growth of seven per cent to Rs 6,272 crore (Rs 62.72 billion).

However, net profit grew 16 per cent to Rs 503 crore (Rs 5.03 billion) from Rs 434 crore (Rs 4.34 billion) in year-ago quarter. Revenues from aluminium rose 16 per cent to Rs 2,213 crore due to higher volumes and better prices on LME.

Going forward, this may change if stability does not return to Europe and North America. In the copper business, revenues were up 2.8 per cent to Rs 4,062 crore (Rs 40.62 billion).

As a result of the global macro-economic situation, analysts say, the company has lowered its adjusted Ebitda (earnings before interest, taxes, depreciation, and amortisation) guidance for FY12 to $1.10-1.15 billion, yet maintaining capex/cashflow guidance.