Shimmering metal

Hindalco has raised aluminium prices for a second time this month. The price increase this time around is 5.8%, while the earlier increase, taken on on December 1, 2005, was 6.2%.
Aluminium prices have risen 40% in the past two years and are currently at a 16-year high.

The markets, as expected, reacted positively to the news, with the Hindalco stock ending 3.5% higher compared with Thursday’s close.

The National Aluminium Company is also expected to raise prices in the near future. The aluminium business of Hindalco has done well in the recent past.

In the September quarter, sales of this segment stood at Rs 1,414.1 crore, up 10%, while earnings before interest and tax (EBIT) rose 19% to Rs 434.5 crore.

This was on back of higher volumes and improved realisations. The EBIT margin of this segment improved to 30.7% from 28.2% in the same quarter last year. One of the main reasons profit margin has increased is that an increasing proportion of the aluminium business now comes from value added products.

Analysts expect this segment to continue to do well on the back of booming economies of India and China.

The very fact that prices have been raised by over 12% indicates that the demand outlook is strong. Hindalco seems well placed to capture much of this increase in demand. It has plans of increasing its aluminium capacity by over 140% over the next five years.

On the other hand, the copper business (44% of revenues) has been a cause of worry this, since the division posted a loss of Rs 16 crore in the first six months of the fiscal.

This was mainly because of a shortfall in production, one of the reasons for which was the commissioning of a new copper smelter at Dahej, which took some time to ramp-up production. But the outlook for the copper business also is much better, especially compared with the performance in the first half period.

Analysts expect Hindalco’s earnings to grow at an average rate of 15% over the next two years thanks to increase in capacity and the stable price outlook. Based on this, the current price-earnings valuation of about 9 times doesn’t look too expensive.

Third ‘trip’ for Thomas Cook

The markets seem to have a history of reacting negatively to Thomas Cook’s annual results. For the third year in a row, the Thomas Cook stock has fallen soon after its annual results were announced.

This time around, the drop wasn’t steep. But considering that the markets rose by over 1.2% on Friday, the 2.5% drop in Thomas Cook’s stock price does indicate that the markets were unhappy with the results.

The annual result, clearly, doesn’t paint a pretty picture. Consolidated revenues dropped marginally by 1% to Rs 131 crore in the financial year ended October 2005, while operating profit fell 4.4% to Rs 40.4 crore.

But things could have been worse if it wasn’t for a pick up in performance in the October quarter. Last quarter, operating profit rose by an impressive 32.3%, as the company shook off the adverse effects of the tsunami and the floods in Mumbai.

The tsunami late last year had hit performance in the period between November 2004 and April 2005 (the first half period of the last financial year for the company), as demand for its travel related services fell.
Operating profit had dropped 24.3% during that period. But things have improved since - in the second half of the year, that is between May and October this year, operating profit rose 15.6%.

The company still has to grapple with the negative sentiment with regards to the earthquake in Kashmir recently. Some countries like Australia have advised their nationals against traveling to the region after the earthquake. Nevertheless, things are much better compared to a year ago, when the tsunami had hurt the company badly.

The company’s financial services (forex products and services) business suffered not only because of the natural calamities but also due to a lower inflow of foreign exchange arising from lower prevalent interest rates in foreign currency accounts.

Similarly, the travel services division had to also contend with a reduction in its commission structure and reduced airfares last year. It’s no wonder profit margin of both divisions fell last year.
It’s interesting that the Thomas Cook stock reacted negatively, despite the fact that the company’s performance improved in the fourth quarter.

The explanation may lie in the high valuations the stock enjoys. Based on the consolidated earnings reported for financial year ended October 2005, Thomas Cook trades at 31 times earnings, which is high considering that the company’s consolidated net profit has grown at a compounded average growth rate of 12.7% in the past three financial years.
Of course, the reason the company enjoys high valuations is not only because of fundamentals, but also thanks to rumours of it being acquired.

(Contributed by Vivek Kaul & Mobis Philipose)