Hindalco – a Freshly Wrapped Opportunity

Date: June 12, 2012      CMP: 121      Mkt Cap: 23,300 crore      P/E: 8.44 times

Hindalco has built a substantial integrated global business in Aluminium and Copper. Consolidated Revenues, EBITDA and PAT have gained by 38%, 22% and 14.4% CAGR over 7 years. Debt has been reduced; the share price is reversing now from a 15-month fall. The P/E is at the lower end of a 7-year range. Copper business is profitable and Aluminium is on a recovery. Advice: Invest for the long term

Hindalco (HC), the flagship of the Aditya Birla group, makes Aluminium (Al) & Copper (Cu).

Business Snapshot:

  • The consolidated turnover is 71k cr, profits 2,900 cr (FY11). Promoters hold 41.8%.
  • Subsidiaries are Novelis Inc., USA, Birla Copper and Aditya Birla Minerals; just 33% revenues are from standalone HC. It has 19,000 employees, and a global footprint in 13 countries.
  • Most products are B2B, and the brands include Freshwrapp aluminium foil, Everlast aluminium roofing sheets, Freshpakk semi-rigid containers
  • Al operations extend across bauxite mining, metal production (alumina refining, Al smelting) rolling, extrusions, foils (value added products), recycling, plus captive power plants and coal mines. The Cu unit produces copper cathodes, rods and by-products such as gold, silver and DAP fertilizers.

Lets do a quick analysis of this stock to see where it’s heading.

Pricing Snapshot

Hindalco Share Price, JainMatrix Investments

Fig1 – Hindalco Share Price, JainMatrix Investments

A 7-year view of the share price of HC shows us:

  • Share price has risen by 1% CAGR over the last 7 years – so it is mostly flat.
  • The share has been very volatile, as from a high of 221 in May ‘06; it fell to 38 in March ’09 to an all time high of 251 in Jan 2011. Today’s price is 121. HC has a Beta of 1.59 (per BSE), so on average a fall in Sensex results in a 60% greater fall in HC; conversely a rise will see HC rise more.

Commodities Pricing

  • Al and Cu are global commodities, and prices are set by LME. See prices range in Table. Al and Cu businesses are cyclical in nature, so the industries go through periods of booms and busts.
  • For HC, the Al business is dependant on LME price while Cu is quite independent, as it is a ‘pass through LME’ business. So, the businesses complement each other and reduce overall volatility.
  • The Al market expert opinion is that at $2000/tonne, the LME price matches the global average cost of production. If price falls below this, many units will stop production, squeezing supply and soon raising prices. So this may be a floor on the price.
Copper Prices, JainMatrix Investments

Fig 2 – Copper prices, 2005-12 Aluminium prices, JainMatrix InvestmentsFig3 – Aluminium prices, 2005-12

Opportunities and Concerns

Opportunities

  • The ’07 acquisition of Novelis involved substantial debt. However good cash flow and prudent debt handling means that DE has fallen from 1.9 in ’08 to 0.95 in ’11.
  • Al consumption in India is 1/10 the global average, and is expected to grow rapidly.
  • In Jan‘12, Novelis renewed an agreement with Coca-Cola Bottlers’ Company for supply of aluminium can sheet for the latter’s beverage can producers in North America. This is very positive as previous litigations are resolved, the pricing is linked to LME and substantial revenues are visible.
Concerns
  • Rising Coal prices, particularly due to price increases from Coal India.
    • To some extent, the coal prices in India will rise, as they are broadly lower than global prices
  • The share price of HC has fallen in 15 months from a high in Jan ’11, by 52%.
    • However the share price fell to 105 by May 23 ‘12. From this level price has recovered by 15% till today, and risen past the 20 and 50 DMA. (200 DMA is at 131).
Hindalco Consolidated Financials, JainMatrix Investments

Fig4 – Hindalco Consolidated Financials, JainMatrix Investments

Financial Snapshot

  • Consolidated Revenues, EBITDA and EPS have gained by 38%, 22% and 14.4% CAGR over 7 years. See Fig 4.
  • P/E has moved in a range of 8-29 times in this period, and is currently at 8.4 times, near lower end.
  • Dividend has been steady at 150% or Rs 1.5, indicating a dividend yields of 1.24%.
  • PEG is at 0.59 – indicates an undervalued stock.

Conclusions

  • HC is a buy at these levels, as:
    • There is substantial growth in revenue and profits. Cu business is profitable. Al business appears to have bottomed out.
    • The Price appears to be recovering from an excessive fall over 15 months.
  • Cautious Investors can watch out for June 27 HC Consolidated FY12 results to confirm bullish expectations. Also watch for a price rise above 131 to move to bullish territory.

JainMatrix Knowledge Base:

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