Apr 25, 2003|
Aluminium: Comparing metal
When we think of size in the aluminium industry, the first name that would come to our mind would be the international aluminium major, Alcoa. However, if one considers some of the lowest cost producers of aluminium in the world, Hindalco cannot be missed out. In this article, we take a look at how these two companies compare on various parameters.
To begin with, here is a brief description of the two aluminium majors. US major Alcoa Inc., world’s leading producer of aluminum, has a capacity of about 3.9 million tonnes (MT) which is nearly 1/6th of the world capacity. On the other hand, Hindalco is the largest domestic private player with an aluminium capacity of 342,000 tonnes. However, if we take into consideration, the capacity of the soon-to-be-merged Indian Aluminium (Indal), then the capacity increases to 414,000 tonnes (2% of global capacity). The company has a 50% market share of the domestic aluminium capacity.
*All figures for Alcoa are for the calendar year 2002
|Market Cap. (US$ m)
|Sales (US$ m)
|Operating margins (%)
|Net profit margins (%)
**All figures for Hindalco are 9mFY03 annualised
Note: Rs 48 = US$ 1
Note: P/E(x) as on April 22, 2003
Beginning with the size of the two companies, Hindalco is nowhere near the international major. It can be seen in the table above that the market capitalisation of Alcoa is nearly 20 times that of Hindalco whereas, its sales are almost 50 times! Of course, these numbers must be viewed in the backdrop of the fact that Alcoa produced 3.5 MT of aluminium while Hindalco’s production stands at 0.3 MT. Alcoa has presence in 39 countries and supplies to the likes of Boeing (aerospace industry accounts for 7%-8% of the company’s total sales).
But on the operational front, Hindalco is far more efficient than its global counterpart, which is reflected in the operating margin. The reason for lower margins for Alcoa was attributed to the weakness in the general manufacturing environment, more specific to aerospace and telecommunication sectors.
Two things must be noted here. One, average aluminium prices on the LME fell from US$ 1,445 in 2001 to US$ 1,350 in 2002 i.e. 6.6% fall. Second, almost 50% of the company’s sales came from the engineered (used in transportation and building & construction) and flat-rolled products (packaging and consumer market) sales. The sales in these two segments registered a decline of 7% and 13% respectively. Moreover, Alcoa’s 2/3rd. sales are in the US alone and hence, its performance is affected by the domestic economy behaviour.
Now here it can be argued that since aluminium prices were on a decline, why is it that Hindalco was not affected much? For one, the aluminium prices in India are adjusted with a lag effect only after the international price trend is certain. Moreover, there was a price fall on the domestic front also, though not as severe as international aluminium prices. Also, since exports account for only about 15% of total company sales, it was more or less insulated from the large fluctuations witnessed in the international markets.
However, all is not bad at Alcoa. To back this argument, the production per employee figure is something that is relatively better for the company as compared to Hindalco. While Hindalco produces 0.3 MT with a workforce of about 12,000 employees, Alcoa produces 12 times more aluminium with a workforce of 127,000 employees. Hence, the figures of 28 tonnes per employee for Alcoa and only 20 tonnes per employee for Hindalco. Another parameter where Alcoa scores over Hindalco is the market cap/sales ratio, which is at 1 for Alcoa while it is at 2 for Hindalco. It must be realised here that the lower this ratio is, the more attractive the value of the company is. However, considering a single parameter does not conclude valuations of a company.
The favourable story for the international major ends and now we see how is Hindalco superior to Alcoa. The biggest and the most important thing that distinguishes the two companies apart is the operating cost of production of aluminium. This cost for Hindalco is much lower at about US$ 870 compared to world average of US$ 1,180 and Alcoa’s cost of production at US$ 1,270. The advantage for the domestic major is that it has access to huge captive bauxite reserves and power plants, which helps it to lower costs. This explains in part the high operating margins for the domestic major.
On other valuation fronts also, Hindalco seems a better story. The price/book value of Alcoa is at 1.9 times compared to 0.8 times of Hindalco. Moreover, on the price/earnings front, Hindalco is trading at 9x its 9mFY03 annualised earnings while Alcoa is trading at 46x its 2002 earnings! It must be noted here that 2002 was a second year wherein Alcoa disappointed investors by its results. The company’s profits fell from its peak of US$ 1,500 m in 2001 to the current US$ 420 m in 2003. With a return on equity (RoE) at 9% for Hindalco compared to 4% for Alcoa and with the domestic industry growth prospects comparatively better than its international counterparts, it remains to be seen if the markets give Hindalco its deserved valuations.
More Views on News
Aug 22, 2017
Hindalco Industries has reported a healthy growth in the topline on the back of Higher volume and realisation for both Aluminium and Copper segments. However, the bottomline declined marginally primarily on the back a provision of Rs 1.04 billion.
Feb 22, 2017
Hindalco Industries has reported a 14.5% YoY increase in the topline while the bottomline came at Rs 3.2 billion.
Dec 21, 2016
SAIL has reported a 21.4% YoY increase in the topline while the bottomline reported a loss of Rs 7.31 billion.
Dec 19, 2016
Tata Steel has reported a 0.1% increase in the topline while the bottomline was in red in 2QFY17.
Nov 30, 2016
Hindalco Industries has reported a 1.1% YoY increase in the topline while the bottomline has accelerated by 255.4% YoY.
More Views on News
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 16, 2017
The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407