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Hindalco: An inside view

Mar 27, 2003

Hindalco, the flagship company of the A.V.Birla group, is the largest producer of primary aluminium in the country and is also one of the lowest cost producers of the base metal in the world. Following are the excerpts from our recent meeting with the company. The broad objective was to understand the growth prospects of the aluminium sector and Hindalco, in particular. The company sees an increase in per capita consumption. It must be noted here that the relative per capita aluminium consumption in India is much lower as compared to other economies (0.6 kg compared to 3-4 kgs for China). While aluminium prices are not expected to weaken from the current levels, volumes growth will be the driver for the industry. Power (35%), automobiles (18%) and consumer durables (12%) are the key aluminium consuming sectors.

On the automobiles front, the company projects a higher per vehicle consumption of aluminium. Up till now, steel has been the primary metal used in the manufacturing vehicles. But, by virtue of the fact that aluminium is a lighter and stronger metal, the mix is expected to change in the long run (noticeably in engines and components). Moreover, with international automobile majors planning to set up manufacturing plants in India, aluminium consumption could show growth. Since the Indian unit is being used as an export base, MNC auto majors have to comply with international standards. This augurs well for leading players like Hindalco and Nalco.

Power being the single largest consumer (1/3rd. of total demand) for the aluminum sector, the growth prospects for the domestic aluminum sector are immense with the restructuring of state electricity boards (SEB’s). Also, in the years ahead, growth in consumer durables and pharmaceutical segments will increase the demand for aluminium. Given this backdrop, the company sees a 4% growth while a growth of 6-8% in the next 3-5 years on the domestic front also seem to be a reality.

Having looked at the industry growth prospects, how well is Hindalco positioned to capitalize on the growth opportunity? As known, Hindalco is among the lowest cost producer of aluminium in the world. Just to quantify our argument, the cash cost of production for Hindalco is US$ 850 per tonne as compared to the world average of US$ 1,150 per tonne. The company is able to produce the metal at lower costs primarily due to benefits from being an integrated producer. The company’s presence in mining, refining, smelting and access to captive power provide the company the advantage to have control over its cost of production.

The divestment of National Aluminium Company (Nalco) could be the next big thing for the domestic aluminium industry. The government has decided to divest part of its stake in the public sector company, followed by a public issue and ADR/GDR. Hindalco has also evinced interest in buying the government stake along with international aluminium majors like Alcan, Alcoa and Pechiney.

The company has completed its brown field expansion program. Post-expansion, the company’s alumina capacity now stands at 660,000 tonnes (previous 450,000 tonnes) while its aluminium capacity has increased from 242,000 tonnes to 342,000 tonnes. With this expansion, the company (including Indal) now has over a 50% market share of the domestic aluminium capacity. There are no plans for further capacity expansion plans from the current level.

At Rs 552, Hindalco trades at a P/E of 8.3x 9mFY03 annualised earnings. We reckon, while the long-term potential for the company remains intact, the areas of concern could be the weakening of prices (aluminium being a cyclical commodity) and the government’s intentions of lowering the import duty further in order to align with ASEAN levels.

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