Hindalco

Beta 1.15
Institutional Holding 28.2%
Dividend Yield 3.4%
P/E 3 M Cap Rs 8,945 cr.

Hindalco , after the acquisition of Novelis has become the largest value-added aluminium producer in the country. Its Indian operation has two main line of business — aluminium and copper. It owns bauxite mines and is fully integrated as far as production of aluminium is concerned. The company also produces other value added aluminium products, like, wheels, foils, extruded and rolled products among others in India. Its production capacity currently stands at around 4.5 lakh tonnes per annum of aluminium. Novelis is mainly an aluminium recycler and produces flat rolled products. In copper, the company makes profit from treatment and refining, and produces copper cathodes and rods mostly. Around 10% of the copper revenue comes from other by-products like gold, silver and sulphuric acid among others.

FINANCIAL

Hindalco's Novelis acquisition has strained its balance sheet and its profitability at least in the short term. The company recently restructured its debt through rights issue of Rs 5,000 crore, internal accruals and refinancing of old debt. After this restructuring, the net debt raised for Novelis acquisition has come down to $1 billion from the earlier $3 billion. However, the process leads to equity dilution and has thus dented its earning per share. Further, the performance of Novelis has been very dismal in recent times. Except for Jun '08 quarter, it has been making losses for most of the past quarters. For instance, it reported a loss of $78 million for the six months ended September '08 quarter. However, Hindalco’s Indian operation is doing well. Its cost of aluminium production is one of the lowest in the country. The company enjoys an overall operating margin of around 16-18% and 34% in aluminium business, which is the highest among its peers. The company has reduced its dividend payment ratio over last several years to around 8% of net profit, which is a concern for many investors.

GROWTH POTENTIAL

The company has a number of expansion plans especially in aluminium business. Its alumina plant in Muri was recently commissioned and this would almost double its capacity to two lakh tonnes. Similarly, the aluminium smelting capacity at Hirakud was increased 43% to 1.43 lakh tonnes. These capacity expansions would contribute to the top line in the nearterm. The company has also lined up longterm projects, which are at different stages of execution. For instance, environmental clearance for a three-million tonne mining capacity and detailed engineering plan has already been done for the Utkal Alumina projects. Other long-term projects that would drive the future growth include Aditya Aluminium, Mahan and Jharakhand Aluminium among others. Further, the recent fall in aluminium prices would have some positive impacts on the Novelis numbers, which has entered into fixed price contracts with some customers.

RISKS

The main source of risk comes from its Novelis acquisition, which has been making losses for last several quarters. It would take a while before the company reaps from the money spent in acquiring Novelis. And in the current down-turn this would be even more difficult. The leveraged balance sheet where interest has to be paid irrespective of sales would only add salt to the injury.

TO SUM IT UP

The current scenario seems to be very challenging for the company. The economic slowdown would definitely result in lower sales volume. In addition to it, the sharp decline in LME aluminium prices would drastically affect its top line growth in short-term. Further, the slowdown in developed countries would drastically affect the sales of its overseas subsidiary, Novelis. Last fiscal year, interest accounted for more than twothirds of the net profit on a consolidated basis. Even though the company has paid back some part of the longterm debt, we believe interest would significantly pull down the net profit considering the decline in top line growth and falling operating margin. It can be a good bet for patient and risk-loving investors.