Hindalco: A new perspective

Changing product profile and increased operational scope will see the company get better valuation.

It was easy to track Hindalco’s share price earlier. All you needed to do was follow trends on the London Metal Exchange (LME), and you would have found that the Hindalco stock would replicate the same. But this is set to change now as the company rises up on the value chain and becomes an integrated aluminium products player — something it envisaged to be when it acquired Novelis.

Around 60 per cent of Hindalco’s earnings are now sourced from Novelis, which is not linked to aluminium prices. Moreover, even Novelis has reduced the cyclical element from its operations and is a dominant global player in the cans business, which is not caught in cyclical trends. The cans business accounts for 58 per cent of the product mix, from the earlier 45 per cent.

Moreover, Novelis has turned the corner and is likely to expand capacity by 10 per cent, thereby generating around Rs 4,500 crore in operating profits, reckon analysts. Already, its operating profit margins have improved 120 basis points on a sequential basis to 15.9 per cent. The company just about got some help with LME prices remaining steady, and the improvement in copper margins from Rs 900 a tonne in the December 2009 quarter to Rs 2,000 a tonne in the March quarter provided some succour too.

Hindalco’s greenfield and brownfield expansion plans are also said to be on track. The 1.5-million-tonne Utkal alumina refinery as well as the Mahan aluminium project are to be completed by the second quarter of 2011-12. Essentially, Hindalco will triple its aluminium facilities in the next three years and it already has the reputation of of the low-cost manufacturers in the world. It has achieved financial closure for the project with Rs 5,600 crore so far — analysts estimate around Rs 1,700 crore has been spent and Rs 2,400 crore of expansion spending is slated for the current fiscal. With more visibility coming on stream on the Utkal project, the company can expect better valuations.