Fund managers turn bullish on Hindalco

Turnaround at US-based arm Novelis, stability in prices and a good demand scenario are the reasons

Aditya Birla Group’s Hindalco Industries has caught the fancy of domestic equity fund managers. Last month, they bought shares worth Rs 1,940 crore of the aluminium major, more than doubling their holdings.

A turnaround at US-based arm Novelis, stability in prices and a good demand scenario are factors behind the bullishness. Two years earlier, primary aluminium prices had fallen to below the benchmark cost of production of $1,500 a tonne, due to oversupply. This prompted a shift in strategy at Hindalco to more of value-added products.

Meanwhile, the decline in aluminium’s price forced many other leading global producers to cut their output. With lower supply, the price of aluminium has recovered by at least 25 per cent from its recent bottom to trade currently at $1,915 a tonne.

Apart from this, the demand for value-added products, including cans, for which Novelis is one of the world’s leading entities, has also increased.

The fund houses which showed high interest in Hindalco included ICICI Prudential Mutual Fund, Birla Sun Life MF and SBI MF. Together, these three accounted for 90 per cent of the total purchasing in the counter as they pumped Rs 1,730 crore of the total.

“We had started turning bullish on the metal sector over the past one year. Hindalco, in particular, came on our radar a year before. We had been purchasing since it was at Rs 70 a share but were still quite underweight. The recent buying has been mainly on the back of visible improvement in the metal sector, globally and domestically. Given the stability in pricing for the past few quarters in aluminium, the demand scenario improving amid capacity reduction worldwide, there is quite a lot of value left in Hindalco. We have an internal target (their estimate of uptil where the stock would rise) of Rs 240 and as the turnaround story of Novelis unfolds, we see further upside, with expected rise in profitability, “says the investment head at one of the fund houses, who can’t be named.

On Wednesday, the share closed on the BSE at Rs 185.7, up about one per cent. As of last month, 181 equity schemes had invested a total of Rs 3,400 crore in shares of Hindalco. The schemes which had out in the largest amounts were Birla Sun Life Frontline Equity Fund (Rs 273 crore), ICICI Prudential Focused Bluechip Equity Fund (Rs 249 crore), ICICI Prudential Value Discovery Fund (Rs 223 crore), SBI Bluechip Fund (Rs 191 crore) and ICICI Prudential Balanced Fund (Rs 189 crore).

Many brokerages have also given a ‘buy’ call on Hindalco in recent times. Centrum has maintained a ‘buy’ rating with a target of Rs 245. Motilal Oswal, Edelweiss and Geojit have a target of Rs 230, Rs 229 and Rs 208, respectively.

Centrum's report said, “We maintain our conviction buy on Hindalco with a revised target price of Rs 245 and continue to maintain it as our top bet in the large-cap metals space. Hindalco continued to deliver superlative operational performance from the domestic aluminium business, led by industry-leading cost positioning at 11th percentile in the global cost curve, while Novelis’ performance remained strong. We like Hindalco on account of strong earnings visibility from a low cost aluminium asset base, with favourable coal supply secured, and increased Ebitda (operating earnings) contribution from Novelis and relentless focus on capex discipline, providing room for material deleveraging over FY17-19.”