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Hindalco: Proving mettle

May 6, 2003

In this rangebound market, one stock has quietly gained ground on the bourses since the beginning of the current fiscal. Hindalco, the largest private sector aluminium player, has consistently gained ground in the past one month. While the Sensex has lost 3.4% to date since the start of FY04 (7.5% from its April 7, 2003 peak), Hindalco has gained 15.2% in the same period. What is attracting investors to the stock? In this article, we try to look at some of the reasons, which could have played a part in raising optimism towards the company.

To begin with, Hindalco has already announced its 4QFY03 and FY03 results. The results are, however, not comparable to the corresponding period last year on account of the inclusion of Indo Gulf’s copper business performance with the company. However, let us just look at a couple of numbers in the results. The topline of the company (aluminium division) grew by almost 8% in 4QFY03, which was mainly on account of higher volume sales and a greater share of the value added products in the company’s total revenues. For the full year, the company’s aluminium production showed an increase of 2% while its sales volumes increased by 1.3%. For FY04, the company is targeting a growth of nearly 25% in metal production on expectations of a higher aluminium demand, both domestic and exports. Higher demand would consequently result in higher prices for the metal. Thus, in this sense, the company is well poised to reap the benefits of any upturn in demand.

The value added segment also plays an important role in maintaining the revenues of the company, as downstream products tend to insulate from volatility witnessed in metal prices. The share of the value added products in the total turnover the company has increased from 38% in FY02 to 40% in FY03. In this segment, the sales of extrusions and foils divisions increased by 19% and 14% respectively.

Another factor contributing to the build up of optimism towards the sector could be the rise in aluminium prices on the LME. Aluminium prices have not only increased by over 1% in the last one month, aluminium futures are also trading at a premium to the spot. This assumes significance when compared to the months of February and March, when the futures were trading at par or at a discount to the spot aluminium prices. This again could be due to the improved outlook towards the aluminium industry on the hopes of a recovery in world economies.

On the domestic front, the company has targeted an average growth of 8% in the next 4-5 years. Also, the issue of non-availability of coal has been resolved thus resulting in savings in power costs in FY04. With the brownfield expansion and other cost reduction measures, Hindalco is likely to bring down the cash cost of production of aluminium by US$ 50 per tonne. The passage of the Electricity Bill 2003 is also a positive for the aluminium industry, as over 1/3rd of aluminium is consumed by this sector.

At Rs 631, the company is trading at a P/E multiple of 8x its FY03 earnings (excluding the write-off of Rs 1.6 bn). Given the historical P/E band of the company at 8x-13x, valuations seem to be on the lower end of the spectrum.

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