X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hindalco: Size does matter - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 31, 2002

    Hindalco: Size does matter

    Hindalco Industries Ltd. (HIL) is the largest primary aluminium producer in the country and amongst the lowest cost producers of the base metal in the world. The advantage seems to be a fallout of the company's presence in mining, refining, smelting with access to captive power facilities.

    HIL: Capacity expansion
      Additional Total
    Alumina (MTPA) 210,000 660,000
    Aluminium (MTPA) 100,000 342,000
    Captive Power (MW) 150 769
    Hindalco is in the midst of organic growth. To overcome current capacity constraints the company has undertaken Rs 18 bn brownfield expansion at its Renukoot facility. The company will increase smelter capacity by 100,000 tonnes per annum (TPA) and alumina refining capacity by 210,000 TPA. Aluminium being a power intensive industry, the company has also planned to augment power-generating capacity to 796 mega watts (MW) for meeting increased requirements. The expansion is anticipated to be completed by FY04.

    Nalco: Crown Jewel
    Replacement cost/ share Rs 229
    No. of shares Nos. m 644
    % stake acquired % 46.0%
    No. of shares acquired Nos. m 296
    Acquisition cost Rs m 67,827
    Having said that, with the privatisation programme gaining momentum in FY03, fresh opportunities are facing the company. Among the public sector companies on the disinvestment list is National Aluminium Company Ltd. (Nalco), the largest alumina producer in the country. Based on our replacement cost estimates, HIL will require significant amount of funds to pull through the bidding independently. Consequently, with funds likely to be blocked towards Nalco acquisition, the ongoing expansion exercise could be delayed. The company has not given guidance on meeting the earlier completion date target.

    On July 21, 2002, the A.V. Birla group announced restructuring of group companies to create a non-ferrous major. Under the arrangement, the copper business of Indo-Gulf Corporation Ltd. will be merged with HIL. Shareholders of Indo Gulf will receive 1 share in HIL for every 12 shares held. Further, they will receive 1 share of the stand-alone fertilizer business, Indo Gulf Fertilisers Ltd., for every 5 shares currently held. HIL is also desirous of acquiring 100% control in it's subsidiary company, Indian Aluminium Company Ltd. (Indal). Consequently, the company has made an open offer for the balance 25.6% non-promoter shareholding at Rs 120/ share. On successful completion of offer, which could cost the company Rs 2.2 bn, HIL plans to de-list Indal.

    Hindalco: Stretched target
    (Rs m) HIL IndoGulf* Indal Merged**
    Sales 23,314 21,650 13,684 58,648
    Operating profit 9,940 4,468 2,217 16,625
    OPM (%) 42.6% 20.6% 16.2% 28.3%
    PAT 6,860 2,419 1,171 10,450
    No. of shares 74.5 225.2 71.1 104.2
    EPS 92.1 10.7 16.5 100.3
    Networth 62,410 9,770 9,302 81,482
    Debt 5,730 7,679 3,972 17,381
    Debt/equity (x) 0.1 0.8 0.4 0.2
    Cash & cash equivalents 7,753 3,116 2,302 13,170
    Free Cash Flows 3,858 2,297 875 7,029
    *Estimated numbers **Assuming Indal merger, all nos. are estimates

    We reckon, the restructuring is likely for enhancing the size of the balance sheet to increase the bidding capacity of the enlarged entity. We undertook an exercise to get a feel of the impact on the merged entity (including Indal). Assuming the merged entity is able to liquidate cash & cash equivalents to a significant extent and entirely use free cash flows, there could still be a shortfall of Rs 53 bn. Raising balance funds through borrowings is likely to considerably impact leverage ratio of the merged entity, which will increase the financial risk profile. Consequently, since restructuring announcement, the stock has declined from Rs 700 levels, as markets believe HIL will make a serious bid for Nalco.

    But a successful bid will also result in inclusion of Nalco within the group. Nalco, which has a much lower leverage ratio compared to the merged entity, could positively impact financial leverage of the combined group. We reckon, operating profits of the combined group is likely to comfortably cover the higher interest outgo.

    Having said that, based on financials of the combined entity, current valuations of HIL are low. But, valuations are reflecting the uncertainty in final outcome. Reports suggest several international majors are also likely to participate in the privatisation, which include Alcoa, Alcan, BHP Billiton and Kaiser. With increased competition bidding price for Nalco could get aggressive, which would adversely affect group financials. Consequently, investors are likely to remain cautious on Hindalco.

     

     

    Equitymaster requests your view! Post a comment on "Hindalco: Size does matter". Click here!

      
     

    More Views on News

    Hindalco: Strong Performance at Operating Level (Quarterly Results Update - Detailed)

    Feb 22, 2017

    Hindalco Industries has reported a 14.5% YoY increase in the topline while the bottomline came at Rs 3.2 billion.

    Hindalco Industries: Strong Operational Performance Boosts Profitability (Quarterly Results Update - Detailed)

    Nov 30, 2016

    Hindalco Industries has reported a 1.1% YoY increase in the topline while the bottomline has accelerated by 255.4% YoY.

    Hindalco Industries: Cost Efficiency Boosts Profitability (Quarterly Results Update - Detailed)

    Aug 18, 2016

    Hindalco Industries has reported a 11.4% YoY decline in the topline while the bottomline has accelerated by 379% YoY.

    Hindalco Industries: A Stellar performance (Quarterly Results Update - Detailed)

    Jun 6, 2016

    Hindalco Industries has reported a 7.5% YoY decline in the topline while the bottomline has accelerated by 123.4% YoY.

    Hindalco Industries: Realisations Hurt Topline (Quarterly Results Update - Detailed)

    Feb 17, 2016

    Hindalco Industries has reported a 5.3% decline in topline while the bottomline has declined by 88.7%

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    HINDALCO SHARE PRICE


    Aug 18, 2017 (Close)

    TRACK HINDALCO

    • Track your investment in HINDALCO with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    HINDALCO - ARIHANT SUPER COMPARISON

    Compare Company With Charts

    COMPARE HINDALCO WITH

    MARKET STATS