Hindalco: Not heavy metal

Even at Rs 96 per share, the issue is not so attractive for shareholders.

Given the weakness in the equity market, Hindalco has had to re-price its rights issue downwards. Shares will now be issued in the ratio of 3:7, at a price of Rs 96.

That may be at a discount of nearly 30 per cent to the prevailing price of Rs 136, but since a shareholder will get just three shares for every seven held, the average cost per share will be Rs 124. That’s just about a 9 per cent discount to the market price and at Rs 124, the stock trades at 7.8 times estimated FY09 earnings (pre-rights).

That may not be too expensive but it’s not cheap either given that the consolidated balance sheet –which includes Novelis—remains highly leveraged with a gross debt of close to $8 billion and, since analysts believe, it could be a while before Novelis contributes to cash flows. Moreover, there will be an equity overhang resulting from the impending dilution of close to 30 per cent.

With interest rates now far higher than they were even six months ago, the aluminium major is looking to raise equity, hoping to bring down the debt on its books. Even after the rights issue, Hindalco will be left with loans of around Rs 7,500 crore.

In the June 2008 quarter, Hindalco’s (stand-alone) net revenues were down by 1 per cent y-o-y to Rs 4,647 crore led by a drop in volumes for both aluminium and copper, though both fetched better realisations.

While lower production of copper impacted sales, the aluminium segment saw revenues increase by 10 per cent y-o-y to Rs 1,843 crore, with rolled products bringing in better realisations.

Operating profit margins for the firm were up by 150 basis points at 20.2 per cent due to lower operating costs, especially for aluminium. The net profit of Rs 697 crore was driven, to a large extent, by higher other income.

Hindalco will be expanding capacity by three times to 1.5 million tonnes in the next 2-3 years. But that is some time away and the growth in volumes could remain muted in the current year as more capacity will be available only from the brownfield expansion taking place at Hirakud and Muri, with the refinery in Muri expected to reach full capacity, to 450 kilo tonnea per annum, during the year.

The Hindalco stock has corrected nearly 37 per cent since the start of 2008 and has come off by 12.5 cent since the rights issue was announced on June 20.