Hindalco: Bottom-fishing not a good idea for short-term gains

Weak aluminium prices and declining premiums to continue putting pressure on profitability

The Hindalco stock has continued trending down from its high of Rs 198.70 in July last year to a 15-month low of Rs 113.60 last Tuesday. The weakness might seem to be a good opportunity for fund houses and patient investors who are buying with a long-term view. But, investors need to be cautious on near-term challenges the company faces.

First, commodity prices continue to remain weak with lower demand from China, while uncertainty on Greece is adding to the woes. While, on the one hand, the 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 impacts their profitability.

Aluminium prices on the LME (London Metal Exchange) that had crossed $2,100 a tonne in August 2014 have come 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 the first half of FY15 to $350 a tonne in the March 2015 quarter and are said to be close to $200 a 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 profitability coming under pressure. The company that had seen aluminium metal production increase 20 per cent year-on-year and 12 per cent sequentially to 242,000 tonnes during the March 2015 quarter had seen its aluminium segment Ebit (earnings before interest, tax) decline 20.3 per cent year-on-year and 13.4 per cent, sequentially. The margins are likely to remain under pressure in the June 2015 quarter too.

There is some respite as well. In the recently concluded coal auctions, Hindalco has secured a large part of its Mahan and Aditya’s smelter requirements. Analysts at Reliance Securities say 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. Also, its 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 (economically) viable high-strength steel is to compete for auto aluminium. In this backdrop, at least till aluminium premiums stabilise, the uncertainties on Europe related to Greece subside, and there is some uptick in aluminium prices, the pressures on profitability for Hindalco is unlikely to ease.