Aluminium: Who's performed better? - Views on News from Equitymaster

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Aluminium: Who's performed better?

Aug 21, 2008

In last few articles, we have discussed the performance of P&L accounts and balance sheet of Nalco and Hindalco. In this article, let us see how has the stock price of the companies performed between the period 2003 and 2008 and compare them against each other in terms of returns. The chart below shows the returns the investor got from investing in the stocks of both the companies between the period 2003 and 2008.

We see from the graph that if one were to invest Rs. 100 in Hindalco in Dec 2003, he would have made hardly any money from the stock's movement on the bourses. On the other hand, a similar investment in Nalco during the same period would have grown to Rs. 200, a CAGR in the region of 16%.

As we know, share prices are nothing but indicators of an investor's expectations of a company's future earnings. So if we see from the graph, investors expected both the companies to grow in a similar fashion till FY07. However, the period after that witnessed a sharp diversion in the share prices of both the companies with Nalco significantly outperforming its private sector counterpart. The strong upward spike in Nalco's share price could be a result of its decision of not only expanding its domestic capacities but also venturing abroad in countries like Indonesia, which could give its earnings a big boost.

Hindalco's poor performance on the other hand could be attributed to its acquisition of Novelis in May 2007 for which it had to take substantial debt, thus putting its near to medium term earnings and consequently, the stock price at risk. It is quite possible that investors in Hindalco could get compensated at a later date when the benefits of the Novelis acquisition start trickling in. However, the possibility of the Novelis acquisition not yielding the desired results cannot be completely denied either.

The study of the movement in share prices gives us very important insights into how management, in the long-term interest of the company, has to sometimes take decisions that are detrimental to the near term valuations. For investors, it is indeed a matter of choice. If they understand the industry thoroughly and have faith in the management, they could ride the bad times with the company and reap handsome rewards during good times or make a hasty retreat.

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