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The Hindalco stock has tumbled from highs of Rs 198.70 in July last year to 15-month lows of Rs 113.60 last Tuesday. The weakness may seem to be a good opportunity for fund houses and patient investors that are buying with a long term view. But, investors need to be cautious about near-term challenges the company faces.
Firstly, commodity prices continue to remain weak with lower demand from China while uncertainty on Greece is adding to the woes. Soft international raw material prices are not favourable for Indian players having captive supplies as they lose their competitive advantage to global non-integrated peers. Weak base metal prices further impact their profitability.
Aluminium prices on the LME that had crossed $2,100 a tonne in August 2014 came down to sub-$1,600 a tonne levels a few days back. Also, regional premiums for the metal have declined from $450 a tonne in first half of FY15 to $350 a tonne in March 2015 quarter and are said to be close to $200 tonne now consequent to the decline in LME price, say analysts.
Thus, the benefit of volume boost coming from expanded capacities at Aditya and Mahan aluminium smelters gets diluted with the profitability coming under pressure. The company that had seen aluminium metal production increase 20% year-on-year and 12% sequentially to 242,000 tonne during the March 2015 quarter had seen its aluminium segment EBIT decline 20.3% year-on-year and 13.4%, sequentially. The margins are likely to remain under pressure in June 2015 quarter too.
But there is some respite as well. In the recently concluded coal auctions, Hindalco secured a large part of its Mahan and Aditya’s smelter requirements which would help remove uncertainty over coal availability. However, this comes at a cost. Analysts at Reliance Securities say that the bids at which Hindalco has won these mines will lead to higher input costs.
The company’s US subsidiary, Novelis, too, is facing headwinds. Inability to pass on costs of earlier metal bought at higher regional premiums impacted the performance of Novelis in March quarter and is likely to cause stress in the coming quarters as well, believe analysts.
Also, the higher margin automobile segment can see pressure increase further. While on the one hand automotive aluminium demand is likely to suffer from overcapacity in the US, analysts at ICICI Securities say that (economically) viable high-strength steel will further impact auto aluminium.
In this backdrop, at least till aluminium premiums stabilise, uncertainties on Europe related to Greece subside and there is some uptick in aluminium prices, Hindalco is likely to remain under pressure. The copper segment, on the other hand, that contributed about 20% to consolidated revenues in FY15 is likely to see profitability remain intact, helped by high Tc/Rc margins and by-product credits, feel analysts.
