Russian Impact On Metals Not Seen Severe

An impact study carried out by Kotak Securities on the Russian developments has suggested that the crisis may not be totally bad for the Indian metal companies. The report has said that in the aluminium sector, Hindalco would stand to gain on account of its strengths in the domestic market, low risk to its earnings and attractive valuations.

While the brokerage has warned of a wider effect of the economic problems linked to Russia, there are three positive factors arising from the global markets:

Stable demand growth in the key consuming markets of the US and Europe;

Relatively balanced global market; and,

Low inventory situation.

According to the report, the recent Russian developments are a modest, `indirect negative' for Indian metal producers to the extent that prices will remain under pressure. In those terms, investor sentiment towards base metal stocks would continue to remain affected.

"However, in the universe of base-metal stocks, Hindalco would have to be looked at as a beneficiary of current domestic conditions in the aluminium market rather than as a global commodity. While the macro-environment is not entirely in favour of aluminium stocks (and is compounded by greenfield projects for Hindalco), the short-term positives and healthy earnings growth cannot be ruled out," T N Giridhar, analyst, Kotak Securities, says in the report.

India would be less impacted by the Russian developments but there would be some fallout because of the developments across Asia, especially Japan, and Russia.

There is a fear across the metal markets of how long the US and European economies would remain unaffected by these developments. Russia is a net exporter of aluminium to the west, mainly the US and Europe.

China would also be a source of concern as the country is a net importer of both alumina and aluminium, and accounting for 10 per cent of the global aluminium consumption. "Any slowdown in the Chinese consumption can further upset the metals' market balance and will have a negative impact on commodity prices," says the report.

Hindalco's forecast of 15 per cent growth earnings in fiscal 1999 is supported by lower domestic supply because of Nalco's production disruptions (which are expected to continue until December).

In terms of valuations, Hindalco is at a 37 per cent discount to the Bombay Stock Exchange Sensex PE multiple. On EV to replacement-cost basis, Hindalco is trading at a 49 per cent discount. "While macro-factors may not be in favour of Hindalco, the impact of these on Hindalco may have been overdone," the report says. Aluminium production across the western world, including the eastern bloc supply, has remained steady over the past three years, gaining marginally from 177.18 lakh tonne in 1996 to 186.70 lakh tonne in 1997, and an estimated 192.15 lakh tonne in 1998.

The consumption across the US, UK, Asian and Latin American markets has, in the same period, moved from 178.31 lakh tonne in 1996 to 190.14 lakh tonne in 1997, and an estimated 189.98 lakh tonne in 1998.

Russia is a significant producer and exporter of aluminium. In 1997, it produced 2.9 million tonne (13 per cent of global production) and exported 2.46 million tonne (85 per cent of production) to the west. For the first half of 1998, Russian aluminium production appears to have risen 3.4 per cent to 1.48 million tonne.