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Volumes, value addition help Hindalco post higher net

Netscribes/Prabodh Chandrasekhar

A combination of higher volumes and rich product mix has helped domestic metal major Hindalco Industries stay ahead of the slowdown that has afflicted the sector and post a healthy bottom line.

Hindalco posted 11 per cent growth in net profit to Rs 6781 million for the year ended March 31, 2001. During the same period, the sales grew 12 per cent to Rs 22754 million.

A K Agarwala, president and whole time director, Hindalco said, "We have decided to increase the proportion of value added products and reduce the proportion of the primary base metal." This conscious shift in product mix began a couple of years ago. Value added items like rolled products, foils and extrusions account for over 60 per cent of the total contribution. At the same time, the company cut its production of redraws rods on account of poor demand from state utilities. The company produced 2, 51,492 tonnes of metal in FY01, much higher than the total installed capacity of 2,42,000 tonnes. The metal production in the FY00 was 2,48,930 tonnes.

The primary ingots market was facing sluggishness and pressure on prices due to domestic slowdown in the user sector mainly electrical and transportation. Hindalco realised 20 per cent more on exports at Rs 3763 million mainly on account of higher depreciation of rupee and better average prices for the metal on the London Metal Exchange. But Hindalco in terms of ingot volume concentrated more on the domestic market during last year. Hindalco despite the shortage caused by the shutdown of Bharat Aluminium could not realise higher prices for its metal in the local market due to slowdown.

The significance of the move towards value added product mix should be viewed in the context of slowdown in the user sector. Unlike ingots, the prices of downstream products are insulated from the vagaries of LME. The consolidation of downstream industry and acquisition of Indian Aluminium coupled with integrated production has helped Hindalco to have an edge over competitors in terms of price and market share.

All these factors helped Hindalco to maintain its operating margin at 47 per cent despite a sharp rise in the cost of inputs like fuel, freight and caustic soda. Caustic soda that accounts for 5-6 per cent of the alumina cost has gone up by 21 per cent in the last one year to Rs 890 per 50 kg.

Hindalco's captive power has helped the company to have a better control over its cost of production. Power accounts for 45 per cent of metal cost.

On the financial front, the company's decision to refinance its $48 million loan with cheaper loan and raising of debentures at a competitive interest rate of 10.7 per cent has helped it keep a tight control of interest charges. Despite ongoing expansion project of Rs.18 billion, interest cost rose by just 3.6 per cent to Rs 619 million.

The company has initiated a profit improvement exercise that aims at higher productivity and total savings of Rs 400 million. Agarwala expects the global aluminium consumption to grow by 6-8 per cent in the current year. He expects the US economy to turnaround in the second half of current year and thereby lead to recovery of metal prices internationally.

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