Choosing a stock? Understand annual results

Yesterday, we looked at the basics of an annual report in How to read a company's annual results with Hindalco Industries as an example. Today, it's time to go deeper. 

Hindalco Industries
Fourth quarterly results
Figures in Rs/million

The next step is to look at the latest quarterly result, which is published with the annual result. You will have to look at the last quarterly results of 2005-06 and those of the same period the preceding year.

In Q4 2005-06, net sales rose by 45% compared to Q4 of the previous year. Gross profit went up by 41.5% and net profits rose by 39.6%.

This tells us the fourth quarter of Hindalco was far better than its results for the full year. The rate of growth for both sales and profits is far higher in the fourth quarter than for the entire year. Not surprising, looking at the soaring aluminium prices.

Hindalco Industries
Segmental Results
Figures in Rs/million

Since it is an aluminium and copper company, let's look at the revenue from these segments. Every company is statutorily required to give a segmental break-up of its revenues and profits (results).
 

• Revenues from the aluminium division are only slightly higher than the revenues from the copper division
• Profits from copper are much less than the profits from the aluminium operations
• Another way to look at this result is to divide segment results by segmental revenue, which gives the margin for that division. For instance, the margin for the aluminium division was 35% (21281/60423). For the copper division, the margin was a mere 0.3% (193/53542). This indicates barely any profit is being made.
• Though revenues from the copper division increased in 2005-06, profitability fell dramatically over the last year.

So, just from analysing the numbers, we know that the copper division was a drag Hindalco's profits.

How did the copper division perform?

Hindalco Industries
Fourth quarter segmental results
Figures in Rs/million

Notice that the profit for the copper division in Q4 of 2005-06 (Rs 1,201 million) was more than that for the full year (Rs 193 million). This implies the division made losses in the preceding nine months.

What's more, the margin for the copper division was 6.2% in Q4 compared to 6.1% in Q4 of 2004-5. It's clear, therefore, that there was a marked improvement in the copper division in the last quarter of 2005-06.

The margin for the aluminium division in Q4 was 41%, which too was an improvement on its annual performance.

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Dig deeper

It's necessary to go beyond the above numbers. For that, you have to either take a look at the company's press release, which is usually available on its Web site, or look at analysts' reports.

You can also query the company -- the bigger companies usually have somebody who responds to investors' questions.

This is what the press release says about the copper division:

"Copper Smelter I, which underwent a major shutdown and refractory change during November and December 2005, is back to its original capacity. All operating parameters are stable and further improvements in efficiencies are expected. Copper Smelter II has shown encouraging signs…"

This means that one reason for the terrible performance of the copper division in earlier quarters was a shutdown in its smelter. That problem is behind the company now.

"Copper business revenues increased significantly from Rs 1,059.2 crore to Rs 1,931.7 crore, up 82.4 per cent YoY, fuelled by steep rise in copper prices. The segment profit improved to Rs.120.1 crore vis-à-vis Rs.64.6 crore a year earlier, aided by the incentives available under the Target Plus scheme for impressive export performance. Importantly, the business has shown a healthy improvement over third quarter performance."

The above was with reference to Q4 and also gives production data.

It says, for instance, that, in copper, the difficult operating conditions resulted in marginally lower production during the year as compared to the previous fiscal. However, the current quarter has shown encouraging improvement with copper cathode production rising 18.3% and CC Copper Rods output growing by 11.0% over the corresponding quarter in previous year. As a matter of fact, the copper Treatment Charge and Refining Charge (TCRC) was higher in Q4, which is why the results were so good.

• How to read a company's annual results

All set?

So now you know how Hindalco performed last year and the reasons for its performance. It's important to remember, however, that investing is all about future expectations.

All too often, you'll find that a stock goes down even after reporting god profits because the market had even higher expectations. It's not enough for a company to do well -- it must beat expectations in order for the value of its stock to rise.

Also remember that a company's financial performance is history. What matters is the future. For instance, you should know that the brownfield expansions of Hindalco's alumina refinery and smelter are at an advanced stage. Or that Hindalco's subsidiary, Aditya Birla Minerals Ltd, is floating an Initial Public Offering on the Australian stock exchange.

Most importantly, you must track aluminium and copper prices. Now that both copper and aluminium prices have taken a tumble, Hindalco too will be affected, which is why its stock price corrected by 25% between its high on May 12, 2006, and its close on May 19, 2006.

Nothing in the company's financial results could have prepared you for that!