Profitability of Aluminium Companies in India

Profitability of Indian players in Aluminium Industry

The profitability of Indian players is largely dependent on the international prices of aluminium, which in turn determines domestic prices. In addition, it also depends on the demand for aluminium and cost competitiveness of the Indian players. Hence, we have looked at the expected domestic prices and cost competitiveness of the players to arrive at the expected profitability over the next 2 years.

With the expected decline in international aluminium prices in 2009-10, domestic prices are also expected to decline, though it would be partly insulated with the depreciation of the rupee. Hence, while we expect international prices to average $1,500-1,600 per tonne in 2009, domestic prices are expected to average Rs 89,500-90,500 per tonne in 2009-10.

Indian aluminium producers enjoy cost advantage

The cost structure of aluminium producers globally varies depending on the backward linkages in place. Players that have captive bauxite mines and captive power plants typically lie on the lower end of the cost curve, as they are able to save on alumina and power cost which form approximately two-thirds of the total cost of sales of aluminium.

Standalone smelters that purchase alumina (either on contract basis or spot) tend to have higher costs than integrated players. Non-integrated refineries which buy bauxite and make alumina and subsequently aluminium have lower costs than standalone smelters.

India is among the least cost producers in the world, as all the players in India have captive bauxite mines and power plants. Additionally, labour cost is also comparably lower than regions such as the North American Free Trade Agreement (NAFTA) countries and Europe. India's cost competitiveness will enable players to export the surplus arising from the capacity expansions.

EBIT margins in 2008-09 to decline considerably

The decline in domestic aluminium prices in 2008-09 has not been as steep as the decline in international prices because of the exchange rate effect. International prices in 2008-09 declined by around 15 per cent y-o-y whereas the landed cost of imports declined by a mere 8 per cent. Average EBIT margins of the aluminium segment for the 9 months ending December 2008 fell to 20-21 per cent as compared to 28-29 per cent in the same period of the previous year. In the last quarter, with Nalco and Sterlite (Balco) reporting losses, CRISIL Research estimates average EBIT margins of the aluminium segment of domestic players for 2008-09 to decline and average 18-20 per cent from levels of 28 per cent in 2007-08.

Indian players' profitability is largely determined by international prices, cost of alumina and cost of power, and marginally dependent on the prices of coal and caustic soda. With an expected decline in global prices for 2009 ($1,500-1,600 per tonne) and a slight improvement thereafter in 2010 ($1,600-1,700 per tonne), domestic realisations are also expected to move in the same direction. Domestic prices are likely to average Rs 89,500-90,500 in 2009-10 and Rs 91,000-92,000 per tonne in 2010-11. Given the expected decline in raw material prices and other operating costs in 2009-10, and expected lower realisations, EBIT margins of the aluminium segment of Indian players are likely to decline by 100-200 basis points. While we do not expect a significant change in costs in 2010-11, EBIT margins in 2010-11 are expected to improve marginally by 200-400 basis points on the back of the expected improvement in realisations.