The outlook for both aluminium and copper has improved but the company remains highly leveraged
Although aluminium prices are not expected to firm up as much as copper’s, the Hindalco stock has been a big gainer over the past weeks, rising 31 per cent compared with a 7 per cent move for the Sensex. Industry watchers say there is still some amount of over-capacity, resulting in a slower recovery for aluminium prices than that of copper.
Of course, Hindalco earns realisations that are way better than what the prices on the LME suggest and that’s because it sells more than half its domestic volumes in the form of value-added products.
Analysts point out that in 2008-09, the company’s average realisations fell by less than $100 a tonne compared with a fall of $396 a tonne on the LME. The Hindalco stock has also been moving up because Novelis, an unlisted subsidiary, has recovered over the past few months with profitability per tonne in the June 2009 quarter improving significantly.
According to Macquarie Securities, Novelis returned to normalised adjusted Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne of $179 in the June 2009 quarter from the low of $83 per tonne in the March 2009 quarter, driven by cost-cutting and an improved product mix.
With the company likely to sell better volumes, the brokerage believes the Ebitda per tonne could increase to $230 per tonne. What’s worrying about Hindalco is the fairly large quantum of debt of close to $4.5 billion at the consolidated level, indicating a debt-equity ratio of 1.4 times. The company is looking to remedy the situation through an infusion of equity — it reportedly plans to raise around $500 million through a combination of qualified institutional placement and GDR. But then, it also has some fairly large expansion plans.
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According to the management, Hindalco plans to invest close to Rs 5,600 crore this year, and around Rs 11,000 crore in 2010-11 in both greenfield and other projects. It’s therefore possible that the fresh equity being raised would result in more borrowings. Therefore, the gearing may not improve in the near term.
Moreover, the equity base will see a dilution and it is possible the earnings too could get diluted both in the current year and the next year. At the current price of Rs 138, the stock trades at 13.5 times estimated 2010-11 earnings and is expensive.