Analysis: More uncertainty for Hindalco stock

The shutdown order of its Hirakud power plant adds to the company?s woes, especially as the Mahan smelter and Utkal unit run behind schedule

Hindalco has touched a three-month low of Rs 111 after the pollution control board asked the company to shut its captive power plant in Orissa. The order to shut down its power plant in Hirakud in Western Orissa was given following a breach in its ash pond causing severe crop damage in the nearby areas.

This order will result in the company shutting down its 367 mw power plant which was used to fire its smelter in Hirakud. Though the company can pull power from the state grid, a Business Standard report quoting senior company officials said that Hindalco might have to shut down its operation.

 

Hirakud has the most cost-effective smelter within Hindalco at a production capacity of 161,000 tonne per annum of aluminium. This unit has a captive coal mine in Talabira which makes its production cheaper.

This unit is also going in for an expansion of 60,000 tonne and the production of flat rolled products which would give the company entry in the aluminium can business in India. The company caters to international supply of cans through its acquisition Novelis.

Even if the company does not shut down its smelter, buying high cost power from the state government will affect its profitability till the captive power plant is commissioned. Press reports suggest that heavy rains resulted in Hindalco’s ash pond developing a crack which inundated the neighboring fields. While repairing the ash pond might take some time as it would require to be drained and then get the requisite clearances from the state authority, the recent developments have added to the growing uncertainty on the stock.

Hindalco has been hit on account of delay in clearance for its Mahan smelter which is already behind schedule. Further, its Utkal unit has not yet been commissioned. The company has seen a series of downgrades post its June 2012 results on account of lower profits which was due to higher cost of its raw material and lower aluminium prices.

The current development will only dampen the sentiment on the stock further as it adds another element of uncertainty on when its unit will be stabilised with its own power plant.