Hindalco: Sweet timing

Better prices in aluminium business and expected growth in volumes are seen as strong positives for the company.

With aluminium prices recovering from recent lows, Hindalco is set to see volumes grow. The company may have just timed it all very well. Aluminium prices have rebounded from a low of $1,850 a tonne — a level that was below operating costs and led many smelters to shut shop. The prices are now around $2,200 a tonne.

The improving demand-supply balance and reducing inventory overhang have increased the estimated average London Metal Exchange (LME) price assumption to $2,300 a tonne, according to analysts at Ambit Capital. Volume growth and cost improvements should further boost profitability of subsidiary Novelis. In addition, analysts expect the business to deliver adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) of $315 in the next financial year, compared to $306 in the March quarter.

Hindalco’s standalone net revenue at around Rs 5,146 crore in the June quarter was a mild surprise. But, its net earnings of Rs 534 crore were in line with estimates. Higher realisations in the copper business also helped. Hindalco is now well placed to benefit from the expansion of its aluminium capacities, which will nearly grow to double their current size in the next four years.

The first commissioning is expected at Hirakud in the second quarter of financial year 2011, where capacity is being increased to 161 kilo tonnes per annum (ktpa) in Phase-I and to 213 ktpa in Phase-II by 2012. These capacities would include modern production techniques that could reduce manufacturing costs, said analysts.

This is expected to lead to volume growth of around 26 per cent till 2013, believe analysts. With prices not looking to head south again and, in fact, firming up of late, the volume growth will be well-timed and the turnaround at Novelis will add to the positive sentiment.

The key at the moment is the outlook on aluminum prices. A fall of five per cent will lead to a four per cent decrease in the estimated Ebitda for FY12. On the other hand, a five per cent appreciation in the exchange rate will lead to a six per cent drop in FY12 Ebitda, say analysts.