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.

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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Hindustan Unilever – Too much euphoria?

Date: May 22, ’12                  CMP: 424      Mkt Cap 91,900 cr.      PE 33.4

HUL is the bellwether in fast moving consumer goods (FMCG), and its performance indictes the directions for the industry. The current market cap of 91,900 crore ranks it #13 in India.

HUL declared FY12 revenues of 23,247 crores in May, a 21% rise in net profits for the March quarter YoY and strong momentum in sales. Nitin Paranjpe, widely perceived as a strong leader, has been reappointed MD & CEO for another five years.

Lets do a quick analysis of this stock to see where its heading.

Pricing Snapshot

A 5-year view of the share price of HUL shows us:

HUL Price History, JainMatrix Investments

HUL Price History, JainMatrix Investments – Click to enlarge

  • Share price has risen 16% CAGR over the last 5 years.
  • The all time high of 439 occurred recently in May 2012. Today it is within 4% of this peak.

Financial Snapshot

  • Revenues, EBITDA and PAT have gained by 10.2%, 22% and 8% CAGR over 5 years.
  • P/E has moved in a range of 17-33 times. Currently P/E is near its peak.
  • Operating margins are excellent at 27%. Profit margins are flat at 12%.
  • Dividend has increased to 750%, or Rs 7.5, giving a dividend yield of 1.77%.
  • PEG is at 4.18 – indicates overvalued status.
HUL Financials - JainMatrix Investments

HUL Financials – JainMatrix Investments – Click to enlarge

Conclusion

  • HUL share has shot up from 240 to current 424 levels in the last 2 years. Reasons for this:
    • HUL has rebounded from poor results in FY10.
    • After posting good results for FY12, HUL has appreciated a lot this month.
    • HUL is considered a defensive stock, and is popular in the current bearish markets.
  • Today it is at its upper end of the valuation range. However the profit growth rates cannot support this valuation for long.
  • The fundamentals indicate that HUL is today an overpriced stock. Investors need to exit at these levels.

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Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/