Stock Review: Hindalco

Strong metal prices, streamlining of operations and expansion plans have spurred interest in the company

The growing appetite for metals, especially aluminium and copper, have propped up prices on the premier metal exchange in London and the ripple effect is being felt in India. As is historically seen, prices on the London Metal Exchange have a direct correlation with the share price of Hindalco. This time, too, the 10-15 per cent improvement in prices of aluminium and copper have triggered a similar movement in the Hindalco scrip.

But, it's not just the price movement that is behind the positive sentiment. For one, most of the operations at Novelis, its overseas subsidiary, and the Indian division have contributed to the rise. Hindalco has also witnessed a decline in debt from `28,309.8 crore to `23,998.7 crore. While it has been on track with its debt repayment schedule, some amount of revaulation in the currency has also helped. Subsequently, the debtto-equity ratio has dropped from 1.8 times in the previous year to 1.11 times in the FY10. Similarly, the interest costs have also been on a decline.

Analysts reckon that since a large part of the debt is related to future projects, over 50 per cent of the interest would get capitalised in the last few years. Moreover, with some of the projects coming onstream in the current year, interest costs could jump. But, the management has announced a

`40,000-crore expansion plan to treble its aluminium capacity. While the debt-toequity may rise again, the company may not see an impact on interest costs, as the gestation process continues.

Operationally too, the management will have to focus on streamlining its working capital costs, as the inventory turnover days have jumped from 39 days to 81 in FY10 and so have the debtor days from 37 to 50 days. After planning an optimal working capital strategy, the company had to pump in around

`600 crore to manage it. With the product portfolio moving again towards value-added products, at around 60 per cent, things could improve on this front. The share, however, remains lower than the 65 per cent witnessed during FY06-FY08, reckon analysts. This will impact valuations that remain attractive compared to global peers.