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Expansion concerns for Hindalco

Ujjval Jauhari / Mumbai 20 Apr 12 | 12:15 AM

Murphy’s law seems to be at play at Hindalco Industries. Almost everything that has to go wrong has gone wrong on its expansion plans. The company had crafted a well-laid out plan to increase its aluminium and alumina production capacities. Little did it expect that sourcing coal, which apart from bauxite ore, decides the profitability of a unit, will be hard to get.

Though importing is an option, given the depressed prices of aluminium at present, using this coal would make its aluminium costlier than the market price of the commodity.

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Cola deal to add fizz
There is still hope Hindalco can offer a positive surprise. This confidence comes from a turnaround of its international operation, Novelis, whose profitability used to fluctuate with that of aluminium prices on the London Metal Exchange (LME). This has changed after the company resolved disputes and renewed its contract for manufacturing aluminium cans for Coca-Cola.

Cans accounted for nearly 58 per cent of Novelis’s overall shipment during FY11. In the case of Hindalco, monitoring Novelis is important, as it contributes two-thirds to consolidated revenues. Against a net profit growth of 11.6 per cent in FY11 on standalone basis, Hindalco’s consolidated profit fell by 37 per cent. This is expected to change.

  FY2011 FY2012E FY2013E
Net sales (Rs cr) 71,801 78,554 82,285
% change 18.6 9.4 4.8
Ebitda (Rs cr) 8,002 8,392 9,300
Ebitda (%) 11.1 10.7 10.8
Net profit  (Rs cr) 2,456 3,115 3,220
% change -37.4 26.8 3.4
EPS (Rs) 12.8 16.5 17.2
PE (x) 10.1 7.8 7.5
E: Estimates                  Source - Capital Line, Bloomberg, Analyst Reports 

Ravindra Deshpande of Elara Capital believes Novelis will continue to provide steady stream of cash flows for Hindalco and give impetus for medium- to long-term growth for the company.

Expansion blues
Analysts feel the market will, however, look at commissioning of its expanded capacity to re-rate the stock. Its Mahan smelter, a new 350,000-tonne aluminium project is now likely to fire in June 2012, a delay of three months. This is still not clear, as the Mahan block awaits environmental clearances. ICICI Securities believes even if the Mahan coal block is made available, the time taken to ramp up the block will be around 15 months. Hindalco’s 1.5-million tonne Utkal alumina refinery is slated to be commissioned by December 2012, though coal remains an issue.

Non-availability of captive coal will also impact the Aditya smelter, in the midst of an expansion by 350,000 tonnes. But, due to lack of captive coal, analysts expect only 20-25 per cent of this capacity to go on-stream. Though its current balance sheet is able to absorb the delay, analysts believe the plants need to start soon to avoid deterioration. Falling aluminium prices can aggravate the situation.

Aluminium is trading near the $2,000-per tonne mark on LME. With a global slowdown in construction, automobile and airline industries, analysts expect prices to remain volatile with a higher possibility of slipping lower.

Giriraj Daga of Nirmal Bang observes the aluminium surplus stood at a high of 1.72 million tonnes in January 2012, as compared to 1.24 million tonnes in August 2011. Ravindra Deshpande adds that with weak demand from China, the largest consumer of aluminium, growth in consumption would slow to around seven per cent in 2012, as against nine per cent in 2011 and 17 per cent in 2010.

Caution’s the watchword
Analysts are increasingly turning cautious. Consensus earnings per share (EPS) estimates for FY13 and FY14, which stood at Rs 16.45 and Rs 17.21, respectively, in January 2012 has now been trimmed to Rs 16.13 and Rs 16.74, respectively.

Compared to 86 per cent of analysts having ‘Buy’ recommendations at the start of the March quarter, Bloomberg data shows only 54 per cent maintaining the recommendation. The remaining is split equally between ‘Hold’ and ‘Sell’ calls. Irrespective of the view on the company, the one-year consensus price target for Hindalco stands at Rs 163, against its current price of Rs 128.

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