Hindalco: A timely placement

The company is cashing in on the liquidity in the stock markets and the appetite for equities.

Hindalco’s plan to mop up Rs 2,900 crore through a placement of shares to institutional investors is aimed at raising money at a time when investors appear to have an appetite for Indian equities.

The money may not be put to immediate use for the three greenfield projects that the company proposes to set up as the Rs 16,000 crore capital expenditure outlay will be spent over the next couple of years. However, with the stock market on a roll and foreign institutional investors buying heavily, valuations are rich and is probably a good time to cash in.

The company is reportedly issuing shares at a price of nearly Rs 131 a share, close to the current price of Rs 135. The stock has been doing well in recent weeks and a placement at this price wouldn’t result in too much of a dilution in the equity capital.

Even if the equity is diluted by 10 per cent, it wouldn’t matter too much, say analysts, because Hindalco, (without Novelis) plans to treble aluminium capacity in a few years and that would boost earnings. While demand in the Asian and South American markets is recovering, the outlook in the Europe and North America, which accounts for around two-thirds of the company’s consolidated sales, remains somewhat uncertain.

However, Hindalco’s subsidiary Novelis beat the Street’s expectations for the September 2009 quarter posting a second consecutive quarter of profits. The company reported sales of $2 billion, a sequential rise of 10 per cent, with aluminium shipments increasing 5 per cent quarter-on-quarter.

Most of the growth was driven by Asia and South America. The adjusted earnings before interest depreciation and tax (Ebitda) came in at $180 million, again showing a sequential increase. Analysts, however, point out that while the net earnings came in close to $ 200 million, they did include some unrealised gains on derivatives.

With Novelis on the mend and Hindalco’s stand-alone earnings seeming to have bottomed out, the company is certainly in better shape than it was six months ago. However, analysts aren’t too convinced on aluminium prices and moreover, they observe that the impending dilution will have some impact on the stock. As such, they believe the stock could be an underperformer from the current levels of Rs 135.