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Aluminium: PSU, Private, MNC. Who’s best?

Sep 11, 2000

First the verdict (ofcourse, assuming the markets are right). The MNC, which in this case is ALCOA, commands the highest P/e multiple (25 x) in the group (it is the largest producer of aluminium globally). Next in line is Hindalco, with a P/e of 10 x. The company ranks amongst the lowest cost produces of aluminium worldwide. Last, ofcourse, in National Aluminium (Nalco), a public sector unit, with a P/e of 5.9 x, which is one of the lowest cost producers of alumina worldwide.

Re/$ = 43 HindalcoNalco*Alcoa
Share Price Rs 848 47 1,516
EPS#Rs 85.3 7.9 60.6
P/ex 9.9 5.9 25.0
OPM% 40.7 44.2 17.3
NPM% 26.5 24.1 6.5
Dividend payout##x 11.0 28.3 27.0
ROE% 11.7 15.8 16.7
ROCE% 11.6 12.9 13.1
Sales per shareRs 267.0 28.4 954.0
Sales per employeeRs m 1.3 2.8 6.5
Financial year ended March'00 (for Alcoa December '00)
# excluding extra ordinary income
## three year average
* ROE and ROCE figures are estimates
The Indian aluminium sector is very competitive. This is due to two key factors. First is that prices on the LME have a direct bearing on domestic metal prices (even though they adjust with a lag). Another reason is that Indian companies, especially Nalco (35% of sales in FY99 were generated from exports), are large exporters. They are thus competing with global majors like ALCOA. Another aspect that makes a group more comparable is that these companies are in a restructuring phase. ALCOA has recently merged with Reynold’s and also purchased Cordant Technologies. Hindalco has acquired Indian Aluminium and Nalco has acquired control of International Aluminium Products Limited.

A comparison of key factors throws up an interesting picture. The company commanding the lowest P/e multiple on the bourses, is also the most profitable, operationally speaking. Hindalco emerges winner on the net margin criterion, largely due to its lower interest and depreciation burden compared to Nalco (which is in a capacity expansion phase). ALCOA on the other hand earns margins that are much lower than the Indian companies. Why then the difference in valuations?

Among other factors that could affect the valuations of a stock, the return ratios and productivity levels need to be looked at for a possible explanation. ALCOA scores a clear winner on these counts. Hindalco, which seems to have a low payout policy, lags in this case. In case of employee productivity, however, it is surprising to note that Nalco is way ahead of Hindalco. Nalco, if we may be reminded, is a public sector unit, which is largely characterized by low efficiency and productivity levels.

Given that the markets may be inefficient, there is still some rationale for the differential in valuations between Indian companies and ALCOA. However, the difference in valuations between the Indian companies viz. Hindalco and Nalco does not seem justified. The only factor against Nalco is its PSU parentage, which makes it susceptible to whims and fancies of the bureaucrats.

Probably over time, as Indian companies gain critical mass (Alcoa’s metal producing capacity in near to 5 million tonnes compared to 0.25 million tonnes for Hindalco. Nalco has a capacity of 1 million tonnes of alumina) valuations will converge. The distinct cost advantage enjoyed by Indian companies is apparent from the differentials in operating margin. Another apparent factor is that a globally competitive company, Nalco, has had to pay a price (almost certainly) for its PSU image.

Note: While care has been taken to make results comparable, in view of the difference in methods of accounting followed by these companies a certain amount of variation is likely.

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