Novelis turns strong ally for Hindalco

Hindalco consolidated balance sheet appears stronger. Its debt-to-equity ratio has improved to 1.1 times as of 31 March, from 1.8 times a year ago.

Shares of Hindalco Industries Ltd ended up 1.2% on Friday, bettering the broad market gain of 0.6%. The non-ferrous metal company reported its consolidated results for fiscal 2010. Revenue and profit at its Canadian subsidiary Novelis rose, and Hindalco also ended the year with a much stronger balance sheet.

During the March quarter, Novelis shipped 18% more of its rolled aluminium products than in the year-ago period, and 10% more than in the preceding quarter. Sales grew in all the regions it operates in, a first since the global downturn. But the real improvement comes in Novelis’ adjusted Ebitda, which rose fourfold to $231 million?Rs1,079 crore? over the year-ago period. Ebidta stands for earnings before interest, depreciation, tax and amortization, and is adjusted by Novelis for derivative-related gains/losses and restructuring charges.

What drove the Ebidta improvement? In a conference call, the company management said that right-sizing of operations and higher efficiency contributed to better profitability. Novelis also reported a free cash flow of $355 million in the March quarter compared with $213 million in the preceding quarter. Controlled capital expenditure and better working capital management helped.

The outlook for Novelis in fiscal 2011 appears good, with the management expecting regions such as Asia and South America to continue to drive growth, even as developed markets trudge back to normal levels.

The company will continue to focus on operational improvements, with adjusted Ebitda in fiscal 2011 to exceed $1 billion compared with $754 million in 2010. Novelis is investing in higher capacities, especially in South America, during 2011 and will also acquire additional capacity in markets such as Asia. It also plans to invest further to improve operational efficiencies across its plants. Overall, it will spend $250 million, or around 2.5 times what it spent in 2010.

While the long-term demand outlook for Novelis seems good, its higher capital expenditure plans and the lag effect of rising aluminium prices in the fourth quarter may see some effect on its shorter-term free cash flows. Aluminium prices have begun to decline in the first quarter of 2011. While prices are a pass-through for the company, as it is a processor, its quarterly results may show some volatility as a result.

Hindalco consolidated balance sheet, too, appears stronger. Its debt-to-equity ratio has improved to 1.1 times as of 31 March, from 1.8 times a year ago. That will allow it to fund its domestic expansion plans without unduly straining its balance sheet.

In the longer term, its performance will be driven both by its domestic expansion programme and continued growth at Novelis.

In the near term, however, falling aluminium prices could pose a threat to the profitability improvements seen in recent quarters.

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