Hindalco Announces Results for Q3 FY06

Mumbai, Maharashtra, India , 2006-01-05

-- Strong growth in revenues, up 15 per cent YoY
-- Strong aluminium performance but production shortfall in copper
-- Net Profit for the quarter declines by 13 per cent
-- Net Profit for nine months ended 31 December 2005 increased by 2 per cent

Hindalco Industries Ltd., the emerging metals major and the flagship company of the Aditya Birla Group, reported the results for the third quarter of the fiscal 2005-06 on 30 January 2006.

The company’s revenues moved up 15 per cent to Rs. 2873.7 crore from Rs. 2,490.1 crore for the corresponding quarter of the previous year. Net Profit, however, declined 13 per cent to Rs. 300.6 crore vis-à-vis Rs. 347.3 crore, as the performance of the copper business was impaired due to production losses and factors beyond the control of the company.

The aluminium business clocked revenues of Rs.1564.4 crore, a 16 per cent growth over the corresponding quarter. Sustained strength in LME prices, rising volumes and higher weight on value-added products were the key factors contributing to the growth. As a result the segment profit increased by 17 per cent from Rs. 462.9 crore to Rs. 542.1 crore.

Copper business revenues rose 14 per cent from Rs.1145.4 crore to of Rs. 1308.4 crore on the back of a rising LME.

The business faced its toughest quarter in its eight an half years history because of difficult business conditions.

More specifically, the 180 ktpa Smelter I took a routine bi-annual maintenance shutdown for 25 days. The 250 ktpa Smelter III, commissioned earlier this year, took a forced 19 days shutdown due to minor metal leakage and resultant damage to nearby equipment. On the positive side, the utilization level of the 70 ktpa Smelter II improved over the Q3 FY05 and as also sequentially over the preceding quarter.

Lower smelter up-time and consequent decrease in production during the quarter affected the profit adversely. In addition to that, the copper business had to bear costs of repairs to the two big smelters, suffer backwardation charges and incur high expenses on liquid fuels. Together, these factors impacted the quarter’s results very significantly.

Operational review

Aluminium

Production increased across all product segments on the back of high capacity utilisation levels.
-- Alumina output rose by 3 per cent from 301,794 MT to 310,838 MT.
-- Primary metal production increased 2.3 per cent to 108,710 MT from 106,247 MT.
-- Wire rods turnout grew 17.7 per cent from 14,722 MT to 17,331 MT.
-- Rolling mills production was up 9.4 per cent over 45,268 MT to 49,525 MT.
-- Extruded products registered a rise of 39.8 per cent in the output from 5,979 MT to 8,356 MT.
-- Foils rollout at 7,354 MT witnessed a growth of 2.3 per cent from 7,192 MT.
-- Alloy wheels climbed up 69.2 per cent to 49,531 wheels from 29,273 wheels.
-- Captive power generation increased by 12 per cent YoY from 1,798 MU to 2,011 MU.

Copper

-- Copper cathode production was lower at 44,236 as compared to 54,120 MT in Q3 last year.
-- The output of Continuous Cast Copper Rods increased by 9.6 per cent from 20,691 MT to 22,679 MT.
-- Sulphuric Acid production moved in line with smelter output and was lower at 130,399 MT against 181,981 MT.
-- Production of DAP and complexes declined from 67,874 MT to 37,449 MT.
-- Production of gold grew 19.9 per cent from 1.603 MT to 1.922 MT.
-- Silver output for the quarter was 9.091 MT as against 10.084 MT

Performance of the Copper Smelter I has returned to 100 per cent level after the maintenance exercise. Part of the refractory relining for a furnace of Smelter II was undertaken in the quarter. Smelter III is back in operation after a brief interruption for repairs to certain equipment. Looking ahead, the company expects copper production for the fourth quarter to be significantly better.

Expansion projects

The brownfield expansions of the alumina refinery and smelter at Muri and Hirakud respectively, are at an advanced stage. The brownfield expansion at Belgaum refinery is awaiting clearance for bauxite mines. Considerable progress has been made in the
greenfield projects viz. Utkal Alumina and Aditya Aluminum. For Utkal, 65 per cent of land has been acquired, with rehabilitation and resettlement work reaching 90 per cent completion. For Aditya Refinery and Smelter, 100 per cent land has been identified for acquisition. Agreements for mining bauxite and coal are at an advanced stage of negotiations.

Rights issue

The Company’s rights issue has received an overwhelming response from investors with around 196,600 applications for 284.85 million shares, mobilising Rs.682.46 Crores, 122.83 per cent of issue size, in application money. The allotment of shares is expected to be completed by 15 February 2006 and it is anticipated that the trading of the new shares shall begin by 18 February 2006.

Borrowings

In March 2005 the company had tied up a syndicated 10 year Secured Rupee Term Loan facility with domestic banks for an amount of Rs.49,500 million at a spread of 65 basis points over the 5 year sovereign paper. On 27 January 2006 the company
signed another Secured Rupee Term Loan agreement with a consortium of domestic banks for Rs. 12,500 million borrowing at similar terms and pricing. These loans have been tied up as part of arrangements to finance the company’s expansion plans.

Acquisition of PALCO’s assets

On 13 January 2006, the Asset Reconstruction Company (India) Limited (ARCIL) accepted the Company’s offer to purchase certain assets of Pennar Aluminium Company Limited (PALCO). The assets include a 30 ktpa Aluminium Rolling Mill and a 14.4 ktpa Conductor Rod complex at Nagpur.

The assets were put up for sale by ARCIL under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The facility for rolled products was installed in December 1993 and that for the conductors was installed in November 1994. The residual life of the facility for Aluminium Rolled Products is estimated to be more than 10 years. The assets purchased are on “as is where is & as is what is” basis. The estimated residual life mentioned herein is based on management estimates and has not been independently assessed by any expert.

Industry outlook

Aluminium

Global aluminium consumption is anticipated to grow 4.5-5 per cent during 2006, based on support from a varied mix of end-uses across various regions.

North American demand growth is likely to be sustained by heavy truck and trailer production, aerospace, military, railcar and beverage can segments. In addition, the reconstruction activity in the Gulf after the hurricane damage is expected to support the consumption demand. Construction markets in parts of Europe along with Can Stock demand from tinplate converted to aluminium lines in Western Europe and expanded can-making facilities in Eastern Europe would propel demand for the metal. In addition, Japanese construction sector is also giving positive signals.

Across the world, costs of raw material, viz. alumina, power, carbon materials are impacting smelter margins adversely. It is indeed an irony that we are witnessing smelter closures with aluminium prices at 17-year highs. Some of the recent smelter
shutdowns are in high cost regions of Europe and North America, e.g., Hamburg (132kt), Frederick (195kt) and Steg (44kt) etc.

Aluminium prices have crossed above $2,300 per tonne and reached 17-year highs. We anticipate primary metal prices to be strong over the near term; and be volatile with a floor of $1,800 over the medium term depending on the supply situation.

The company expects domestic metal demand to grow at double digits for the year, boosted by end-use sectors like construction, power, packaging and automobiles.

Copper

Primary copper demand growth in the form of copper cathodes has been subdued during the year. However, demand for end-use products including the semis has witnessed an encouraging trend. This disconnect between primary copper demand and
end-use demand has been filled in by de-stocking. Supply of refined copper has been constrained due to decline in Sx-Ew production and problems at the smelter stage. The low inventory scenario coupled with the supply disruptions has had a magnified
impact on copper prices, which have risen rapidly to above $4,500 levels.

The lower than anticipated smelter capacity utilisation has led to surplus concentrate availability, which is reflected in spot Tc/Rc terms which peaked in April at $175/t & 17.5c/lb, levelling off in Aug-Sep’05t to $125/t & 12.5c/lb and more recently to $135/t & 13.5c/lb on the back of increased mine output at Indonesia’s PTFI and smelter disruptions in Thailand and India.

Over the medium term, we expect copper prices to be extremely sensitive to supply side developments and continued strength in Tc/Rcs driven by increased output coming out from mines to take advantage of the copper cycle highs.

Company outlook

Hindalco is standing at an inflection point on growth curve with both its businesses positioned to reap the benefits of scale. While the company’s aluminium business is poised for a giant leap from domestic leadership to global scale operations, in copper, the company expects better results once the production from the new smelter stabilises.

Notes:-

1. Upon allotment of 231,521,031 equity shares of Re 1 each at a premium of Rs 95 per share on rights basis on 15th February 2006, the issued and subscribed capital of the Company has
increased from Rs 927.75 million to Rs 1,159.68 million and the paid-up capital has increased to Rs 985.73 million. Issue expenses amounting to Rs 365.97 million along with tax effect have been adjusted against Securities Premium Account. The proceeds of the rights issue at 25% of issue price amounting to Rs 5556.50 million have been utilized for the purpose of defraying related issue expenses mentioned earlier and subscription to shares of a subsidiary company to the tune of Rs. 148.89 million while balance amount is temporarily invested in short term liquid securities. Basic and diluted EPS for the quarter and year ended 31st march 2006 have been calculated taking into account the effect of this rights issue.

2. Net Sales & Operating Revenues for the three months and the year ended 31st March 2006 include Rs. 1038 million being benefit accrued in relation to exports made during the year under the Target Plus Scheme announced in the Foreign Trade Policy 2004-09.

3. Provision for Taxation for the year has been worked out after considering the effect of favourable appellate decisions (received during the fourth quarter) as also expert opinion obtained after such decisions, effect being given by also restating the corresponding amounts for the interim periods
for which unaudited results have already been published earlier, so as to convey the relevant information more meaningfully.

4. In compliance with Accounting Standard 28 relating to Intangible Assets, the Company has assessed its assets for impairment as on 31.3.2006 and accounted Rs 44.54 million as impairment loss during the quarter ended 31.3.06.

5. The Board of Directors has recommended a dividend of Rs. 2.20 per share subject to approval of the shareholders at the Annual General Meeting.

6. Disclosure relating to number of complaints from investors during the quarter:

Pending as on 01.01.2006
Received 51
Resolved 51
Pending as on 31.03.2006

7. Figures of previous periods have been regrouped wherever found necessary.

8. The above results have been taken on record at the meeting of the Board of Directors of the Company held on Saturday, 29th April, 2006.

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Contact

Dr Pragnya Ram, Aditya Birla Group, +91 (22) 5652 5000
[email protected]