 "Hindalco might lose some sheen this year")
This is in spite of weak metal prices globally, high finance cost and a downgrade threat by a global rating agency for its subsidiary, Novelis. Nor has a Central Bureau of Investigation probe on the allocation of a coal mine in Odisha dampened the enthusiasm of its investors. However, analysts say the outlook in the financial year starting April 1 is not so rosy and its run on the stock market will depend on global metal prices and how Novelis produces more profits and reduces debt.
In FY2014, Hindalco’s shares moved up 54 per cent, topper among all BSE Sensex companies, on euphoria over expected volume growth from new projects and possible rises in London Metal Exchange (LME) prices. Analysts say, though, that the stock has run ahead of its fundamentals and they expect the return ratios from new aluminium projects to remain dismal. They're also not optimistic on a rise in LME aluminium prices, due to slow demand recovery in North America and slowdown in China. Another big negative is slowing demand for Novelis' products in North America.
Hindalco’s managing director, Debu Bhattacharya, said the company’s business in the nine months ending December 2013 was impacted mainly by falling LME aluminium prices, at an 18-month low. “As a lot of our new capacity is being commissioned now, our finance cost and depreciation charges had gone up. But we expect this (finance costs) to come down, once we ramp up production in the new plants to full capacity,” he said in February.
The good news, he said, was that the company's output was the highest-ever (aluminium at 158 kt) and revenues were up 15 per cent. Now, with all expansion projectsbehind it, the company plans to consolidate operations.
Investors are taking note of Hindalco’s turnaround — its shares have risen 15 per cent since January, as compared to a seven per cent rise in the BSE Sensex.
In the current financial year, Hindalco will have to arrange for captive coal to cut costs at its new Odisha plant, start work at the Mahan coal mine (Madhya Pradesh), ensure Novelis' profits go up, and bring down finance costs on its Rs 24,000-crore expansion. The company is already saving Rs 340 crore a year by refinancing its loans, which helped it to increase its operating earnings. “As our plants become fully operational, this (finance costs) will come down substantially,” Bhattacharya said.
But analysts expect negative earnings before interest and tax and return on capital employed from the new projects of Utkal Alumina, Mahan and Aditya Aluminium for the next two years. This is mainly due to high cost of production at smelters due to lack of captive coal, subdued aluminium pricing globally, initial start-up costs and high depreciation and interest costs on account of large capital deployment.
Hindalco officials say Novelis will do well, as demand for its products are consistently rising from the automobile sector and the company invested $1.5 billion to increase its capacity. Novelis is crucial for Hindalco, as it accounted for 67 per cent of the latter's consolidated revenue and 64 per cent of its consolidated earnings before interest, taxes, depreciation and amortisation. Hence, any ratings downgrade will hurt both Hindalco and Novelis.
"We note that the balance sheet remains debt-heavy, with net debt of Rs 49,000 crore at the end of FY14 and meaningful debt reduction remains more than two years away, due to ongoing capex at Novelis and higher interest costs of new projects," said Abhisar Jain of Centrum Broking. He gave a 'Sell' recommendation in a report dated April 11.