Metal companies are regaining some of their lost shine after the pandemic. Second-quarter margins for Aditya Birla’s flagship Hindalco Ltd showed a good jump from the prior-year quarter thanks to lower costs and a better product mix. But the sale of Aleris’ aluminum foil operations in Lewisport at a lower-than-expected price played a detrimental role for the stock’s returns, which fell about 1.4% on Tuesday.
Still, the second quarter figures were encouraging with consolidated revenue one step ahead of Street’s estimates. In the domestic market, Hindalco’s revenues were a bit slow due to lower aluminum sales. Analysts had expected higher aluminum sales volumes of around 315 kilotonnes, but it reached 303 kilotonnes. Also, the cost of production went up slightly.
However, standalone Ebitda expanded quite well to 25% due to better operating leverage. Ebitda is the profit before interest, taxes, depreciation and amortization.
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Hindalco’s foreign affiliate, Novelis, has also not lagged behind in the recovery and could continue to be a growth engine in the coming quarters. Novelis’ adjusted Ebitda expanded 23% year-on-year, thanks to lower costs and better realizations. Demand for cars has been strong in the US, in addition to the beverage can business showing good resilience with the rise in takeout consumption. The demand for high-end products has also recovered, but the aerospace segment remains silent.
However, the Street was disappointed with the Aleris Lewisport unit’s realizations priced much lower than it had anticipated. The sale of the unit was approximately $ 171 million. Even selling the Duffel plant at a lower-than-expected price appears to have made the Novelis acquisition seem a bit expensive. Analysts had expected both units to fetch about $ 800 million.
“The Lewisport unit could generate an Ebitda of $ 80-100 million due to its automatic finishing capacity and would have generated synergies. The divestment prices of both Duffel and Lewisport are low and have resulted in the overall acquisition of Aleris being costly for Hindalco, “said Siddharth Gadekar, analyst at Equirus Securities.
However, the overall business continued to accelerate. Analysts said that demand for aluminum and copper products could be sustained in the coming quarters due to a revival in automobiles, in addition to global demand. Global aluminum prices rose above pre-covid highs and demand remains good.
It is also the key reason for the stock to show a good post-crash recovery. The stock is 13% away from its pre-covid highs seen in January. Even so, the sharp rise has stretched stock valuations to a forward price-to-earnings multiple of 13 times fiscal 21 earnings.
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