While worries on weak metal prices and demand remain, volume growth, efficiency gains and a low cost base could limit the downside.
Growth worries in the developed markets and falling metal prices led to a 38 per cent decline in Hindalco’s stock price this financial year. Although aluminium and copper prices remained volatile and concerns over a slowdown at Hindalco’s international subsidiary, Novelis, are not over, analysts feel that most of it these are already factored in. While global uncertainties could take a toll on the stock, downside remains limited. On the positive side, benefits on volume growth are likely in FY13 with the commissioning of the Mahan project as well as expansions and efficiency gains at its Renukoot plant. Given the gains, most analysts have a buy rating on the stock with a 12-month consensus target price of Rs 185.
CHALLENGING ENVIRONMENT
For Hindalco, the current environment continues to be challenging. Average aluminium prices at the London Metal Exchange (LME), which were at $2,603 a tonne (up 24 per cent y-o-y) had boosted its performance, despite lower aluminium volumes in the June 2011 quarter. Average prices during the September’11 quarter have, however, declined to $ 2,444 a tonne. Given that current prices are hovering at around $2,186 per tonne, realisations in the December quarter too could be under pressure.
| MARGINS INCHING UP | |||
| In Rs crore | FY2011 | FY2012E | FY2013E |
| Net sales | 71,801 | 78,833 | 82,863 |
| % change | 18.60 | 9.79 | 5.11 |
| Ebitda | 8,002 | 9,071 | 10,074 |
| Ebitda (%) | 11.14 | 11.50 | 12.16 |
| Net profit | 2,456 | 3,391 | 3,643 |
| % change | -37.40 | 38.03 | 7.45 |
| PE (x) | 10.14 | 7.39 | 6.89 |
| Source- Capitalline, Bloomberg, Analyst Reports E: Estimates | |||
Average copper prices have declined one per cent to $9,106 a tonne. However revenues from the copper segment depend on the treatment and refining charges, and hence decline in LME prices has a marginal impact on revenues.
Hindalco’s international subsidiary Novelis may not see much impact as a significant part of the demand comes from the food and beverage space. However, risks to the near-term demand for its electronics and automotive segment could impact revenues.
A DIFFICULT SEPTEMBER QUARTER
During the second quarter, a seven per cent decline in average Aluminium LME prices may be partially offset by the estimated five per cent increase in aluminium volumes to 138 kilo tonnes, believe Motilal Oswal analysts. Benefits could accrue to Hindalco as alumina producers globally have started moving customers away from LME-linked pricing, citing independent dynamics of the sector. This should help them realise better prices, given the demand and a low cost base.
Hindalco further benefits from having excess alumina capacities and the September quarter is likely to see Alumina volumes at 351 kilo tonnes, up five per cent. Copper volumes for Hindalco are also likely to increase eight per cent sequentially to 79 kilo tonnes during the September 2011 quarter, as its smelter was under maintenance shutdown during the June quarter.
While all the positives may help revenue growth, margins may come under pressure due to rising coal and bauxite costs. Analysts at research firm Unicon think the company’s competitive edge of low-cost manufacturing has been offset due to increased cost and policy impasse on coal and bauxite supply.
NOVELIS GAINS
Analysts remained positive on the Novelis performance during the September quarter. Tanuj Rastogi, analyst at the MSFL group feels the Ebitda per tonne should increase during the September quarter. Regarding concerns on Novelis, he argues that the situation is not as bad as it was in 2008. Although there are growth issues and there could be a slowdown, there may not be a fall. Debt concerns, too, are not the same as they were in 2008, post its debt restructuring exercise. Unicon analysts also believe that Novelis is likely to perform well in the second quarter on the back of an improved product mix, cost reduction initiatives and increased conversion margins.
VOLUME GAINS
Hindalco is setting up a 359 kilo ton per annum smelter and 900 MW captive power plant at Mahan in Madhya Pradesh. While the company has plans to commission the plant by December, analysts believe that there could be some delays. A delay of couple of quarters could push the gains from the project to FY13. Coal sourcing however remains a challenge till Mahan coal block is cleared by the government and supplies of alumina from its Utkal Alumina plant start from the September 2012 quarter. Despite these issues, Satish Kumar and Saurabh Prasad of Standard Chartered feel that the Mahan cost of production at Rs 86,308 a ton is comparable to Rs 85,723 a ton at its existing Renukoot plant. Further, Renukoot plant may add 10 kiloton every year through efficiency improvement from here on.
