HINDALCO Industries

Lower cost of operations, higher volumes and improved margins augur well for Hindalco. Investors with a long-term perspective can consider the stock

   HINDALCO Industries, a formidable player in non-ferrous segment, has seen its stock surging to a record high of Rs 184 in the first week of April 10. Since then, however, it has plunged by around 22% in tandem with its metal peers. The sharp fall can be attributed to the concerns of a crisis in the European economy and a weaker-thanexpected recovery in the US trade. However, investors need not worry as long-term growth parameters look intact for Hindalco.

BUSINESS:

The company has presence in two fast-growing nonferrous metal segments — aluminum and copper. It is among the top five aluminium producers in the world. With its subsidiaries, such as Novelis and Aditya Birla Minerals, the company is able to diversify its portfolio giving natural hedge against global business volatility.

   The company focuses more on process efficiency rather than sticking to volume growth. This has helped Hindalco in achieving better margins in the case of Novelis, which the company acquired in 2007. Novelis is likely to sustain strong operating performance as it is a dominant player in the metal cans business. The segment accounts for 58% of Novelis' product mix.

   Sales of FMCG companies are poised to increase and so do profits of Novelis given its dominance in the cans business. Further, demand for FMCG products is somewhat insulated from the industry cycle. This shields Novelis from concerns of slowing demand in the commodity segment. Outlook for other applications, such as automobiles, is also positive.

   The company is investing heavily on both greenfield and brownfield projects. These projects will give Hindalco a much-needed increased capacity to meet growing industry demand. Management foresees inorganic route for growing its downstream aluminium business and aims to achieve 40% self-sufficiency of copper for its smelter in India.

OUTLOOK:

Long-term growth outlook for Hindalco seems positive. Operating profit before depreciation is expected to increase over and above the impressive growth during the quarter ended March 2010 on account of cost savings and high capacity utilisation. Given its capacity expansion, Hindalco is well positioned to take advantage of higher demand in emerging markets and South America. Further, China's decision to allow its currency to appreciate can indirectly benefit Hindalco. 

   An appreciating Yuan can lead to higher Chinese import of commodities, which will in turn support prices of both copper and aluminium. This could lead to higher margins for Hindalco in the coming quarters. Also, Australian government's decision to reconsider its mining tax can further add to Hindalco's revenues as its subsidiary Aditya Birla Mineral has copper mines in Australia.

FINANCIALS:

The company reported sales (standalone) of Rs 19,536 crore, a growth of 7%, in FY10. Net profit was down 14% to Rs 1,916 crore, mainly due to higher coal cost and lower aluminium and copper prices in international markets. On the consolidated basis, net profit was Rs 3,925 crore against Rs 484 crore a year ago. The surge was mainly due to the unrealised derivative gain of about $578 million (approximately Rs 2,700 crore) and improved margins at Novelis.

VALUATIONS:

Hindalco's stock price has fallen on weak European demand and volatility in global metal prices. If we compare Hindalco with its peers such as Nalco, its subsidiary Novelis is the differentiating factor. Beverage business can give steady volume growth to Hindalco. In the case of players such as Nalco, margins would largely depend on aluminium prices. As of now, Hindalco's stock is trading at a price-to-earning (P/E) ratio of 14. The company's profitability in the next two years is expected to increase significantly because of lower cost of operation, higher volume and increase in margins. Investors can look for the stock for a long-term prospective.