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Hindalco: Peeping into past - Views on News from Equitymaster
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  • Jul 18, 2003

    Hindalco: Peeping into past

    Good news is that the Sensex has shot up by 22% in fiscal FY04 so far. Better news is that the stock price of aluminium major, Hindalco, has outperformed the index by a huge margin, registering a growth of 46% since April 1, 2003. This rise has undoubtedly come on the back of promising growth prospects for the aluminium industry. The strength being seen in global aluminium prices is an indication of the same. However, this is the short-term so-called ‘rosy’ picture of Hindalco. But, looking “back” at a longer-term view and how the stock has performed in the last 12 years, one would realise some interesting facts, which is precisely what this article will try to look at.

    Above charts display the stock price of the company in the last 12 years. However, to understand it better, we have broken the chart into two halves – one period starting from June 1991 to June 1997 (6 years), while the other starts from July 1997 (June 30 closing price) to date (6 years). As can be seen in the first chart (Hindalco: One way traffic!), the stock price has had virtually a vertical dream run. However, it is only when one looks at the second half (Hindalco: Losing streak!) that one realises that the stock price has gone nowhere. As a matter of fact, during the latter 6 years under consideration, the stock has actually given negative returns. To get a clearer picture of the stock price returns in the last 12 years, see the table below:

    (Rs) June'91 - June 97 June' 97 - June' 03 June' 91 - June' 03
    Price on June 28, 1991 165 - 165
    Price on June 30, 1997 978 978 -
    Price on June 30, 2003 - 745 745
    Point-to-point growth (%) 493% -24% 352%
    CAGR (%) 43% -5% 15%

    As can be seen from the table above, after the opening up of the economy in the early 90’s, among others, Hindalco also reaped the benefits of a liberalized economy. In the first half of the period under consideration, Hindalco stock price grew at a compounded annual growth rate (CAGR) of 43%. However, in the last 6 years, the stock has given negative returns (CAGR –5%). Because of the growth witnessed in the first half of the period under consideration, the picture gets a bit skewed for the whole period, as is evident from the table above.

    Source: Hindalco Annual Reports

    Let us consider the operating profit margins (OPM) of the company over these years. As can be seen in the chart above, the OPM has consistently risen over the years from a low of 25% in FY91 to the high of 44% in FY01. In FY02, OPM took a hit primarily due to the gloom that had surrounded major economies and industries, which was the after effects of the 9/11 attacks on the US, the world’s largest economy.

    However, the good news about OPM ends there. Now, let us try to look at a couple of parameters, which could probably have played a role in restraining the company’s stock price. Considering a couple of other ratios like the important Return on Average Equity (ROAE) and the Net Sales/Total Assets ratio, the story is quite different. In sharp contrast to the ever-increasing OPM, the ROAE has gone down from a high of 30% in FY91 to a low of 16% in FY02. Also, the net sales/total assets ratio, which hovered over 1 time in FY91/92, has shown a consistent fall to the current levels of 0.4 times.

    All this indicates that the company has been making investments in some class of assets, the returns of which are relatively less appealing. This tends to neutralize the better returns of core business (i.e. aluminium) of the company. Net, net, the overall efficiency of the company at utilising its assets for generating higher revenues has got stunted.

    The above points were just to highlight the fact that Hindalco must concentrate higher on assets/investments with greater returns, and probably continue to focus on non-ferrous commodities, which are its key strengths. A company with operating margins as high as 44% should be able to reward its shareholders in a much better way.



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