Coal-gate probe comes to haunt Hindalco again

Management confident its position will be vindicated but Street cautious; earning estimates unaffected as of now

Even as things were falling in place for Hindalco Industries, after the start of coal mine auctions, the summons by the trial court investigating the coalgate scam to the chairman and some top officials have hurt investor sentiment.

The stock had recovered a good 13 per cent in February to Rs 160s in early March. It gave up all the gains, slumping back to Rs 130 on Wednesday before recovering partly to Rs 135 the next day. The fall this time is largely driven by sentiment, feel analysts, who believe the impact on the fundamental side is insignificant, as of now.

The subject of the investigation is the 15 per cent share given to Hindalco in the combined Talabira-II and III blocks in November 2005. It was also de-allocated in 2014 and the block that was to feed the company’s Aditya smelter never did. This was also due to delays in environmental and other clearances, which delayed the start of mining operations from the block, despite the Aditya Aluminium project becoming operational.

The company, therefore, had to continue sourcing coal for the project from other avenues, impacting its profitability. As a result, Hindalco says it has had to suffer irrecoverable financial stress. The management is confident it will be vindicated at the end of the ongoing legal process.

Nevertheless, the court case has added to some uncertainties, turning the Street a tad cautious, even as the event might not have an earnings impact. Since the block in question had already been de-allocated, none of the forward estimates by analysts were factoring any benefits from this.

Analysts, though, have started looking at the new blocks won by Hindalco in the past month's auctions. Analysts at HSBC had become overweight on Hindalco, with a target price of Rs 200, at a time when the consensus target price was Rs 167 from analysts polled on Bloomberg since February.

The three coal blocks —Kathautia, Gare Palma IV/4 and IV/5 — won by Hindalco in the first round are only 220 km and 130 km away from the company’s Mahan and Aditya smelters, respectively, giving easy access to the raw material. Also, since these mines are operational, they'd be able to supply the basic raw material to the facilities with immediate effect, improving the profitability. Estimates suggest their costs are lower than coal sourced from other avenues. The company has also won another block (Dumri), the impact of which analysts are still assessing.

Overall, the fundamental prospects do not change with the court summons regarding the de-allocated Talabira II & III blocks. Earnings can only get impacted if the court intervenes in newly allocated blocks. However, the Street will watch the events unfolding and analysts feel the overhang of these developments will be seen on the stock price in the interim.

Says Rakesh Arora, head of research, Macquarie, “The stock currently looks cheap but investors could wait for the news flow to settle and look for a positive catalyst.” He believes, the stock could see a time correction, as the business environment, namely, aluminium prices, are weak.

In the immediate term, analysts will look at the March quarter performance and the improvement in profitability, based on which they will review their target prices for the stock.