After rallying 23 per cent from mid-November to early January, the stock of aluminium major Hindalco has again lost steam, shedding almost 16 per cent over the last month.
Fresh concerns over delay in the commissioning of its alumina refinery in Utkal seem to have dampened sentiment and contributed to the latest weakness. But at its current price of Rs 113, the Hindalco stock presents a good buying opportunity for investors with a long-term perspective.
One, its valuations are quite attractive. At 0.7 times, the price-to-book ratio is rather low compared to levels the stock had traded in the past (around 1.3 times).
Also, the current price discounts its trailing 12-month earnings by around 6.5 times, much cheaper than what other aluminium majors such as Nalco, Kaiser aluminium and Alcoa trade at (15 to 35 times).
Hindalco’s poor run on the bourses over the past year (down around 21 per cent) is attributable mainly to delays and cost-overruns in its domestic aluminium expansion plans, which will almost triple the company’s current capacity.
As a result, significant capital has been stuck, as work-in-progress and profitability suffer. Adding to the pain were temporary production stoppages at some of the company’s producing smelters.
Concerns to ease
Also, the performance of the company’s US-based subsidiary Novelis, which processes aluminium into finished products, was eclipsed by lower profits. This was due to lower aluminium prices, a non-recurring tax benefit enjoyed in the previous year, and weakness in the European operations.
Many of these concerns may ease in the coming year. First, the Renukoot and Hirakud smelters, which were shutdown due to environmental concerns, have restarted operations.
Next, the three expansion projects (the 1.5 mtpa Utkal refinery, the 359 ktpa Mahan aluminium smelter, and the 359 ktpa Aditya aluminium smelter) are expected to be commissioned later this calendar.
Of these, the Utkal alumina plant, a critical project which will provide feedstock for the company’s smelters, including new ones at Mahan and Aditya, is likely to be completed by April 2013.
This should aid profits and margins of the domestic business. While lack of captive coal may delay break-even at the Mahan and Aditya smelters due to dependence on costlier e-auctions and imports, the problem is likely to see resolution by FY-15, with captive coal blocks becoming functional.
An increase in the level of integration should provide a boost to Hindalco’s performance in the years ahead.
In this context, alumina prices are rising faster due to higher taxes and export curbs by suppliers such as Indonesia.
Hindalco, by virtue of its Utkal alumina project, may benefit by way of cost savings.
Even if global aluminium prices were to correct, Hindalco, with its integrated operations and low-cost structure, could remain very competitive.
Hindalco also operates a 500 ktpa copper smelter in Dahej, Gujarat, which is mainly engaged in refining and conversion of copper concentrate into metal.
This business, which accounts for around a fifth of the company’s revenues, should benefit from expectations of improvement in treatment charges and refining charges.
Finally, Novelis, which accounted for nearly 68 per cent of Hindalco’s consolidated revenues and around a third of its profit in FY-12, should benefit from a few factors.
The company, which has global operations and produces almost 17 per cent of the world’s aluminium rolled products, enjoys good margins, thanks to its focus on premium segments such as cans (beverages), automotives, laptops and weapons.
Expansions such as the 200 kt auto finishing line by mid-2013 in the US and 120 kt auto finishing line in China in 2014 should aid the company’s volumes.
A thrust towards higher vehicle fuel efficiency by the US Government could also mean increased substitution of heavy steel with lighter aluminium.
This could translate into market expansion for players such as Novelis. An improvement in the global economic climate will also benefit.
Financials
Hindalco’s financial performance has been lacklustre due to the above-mentioned factors such as project overruns and shutdowns which increased operating and financing costs.
For the first half of the current fiscal, Hindalco’s sales (standalone) declined 1 per cent year-on-year, while its profit fell 31 per cent.
The profits of Novelis declined 16 per cent in this period. The company’s debt-to-equity though remains reasonable at 1.1 times.