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Sunday, Jun 06, 2004

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Hindalco Industries: Long-term buy

Krishnan Thiagarajan

IN a volatile market, Hindalco Industries represents a good investment option for investors with a long-term perspective. The stock has recovered by nearly 13 per cent from the low touched on May 17 compared to the Sensex, which rose by 8.5 per cent during this period. At the current price of Rs 977, the stock is trading at a price earnings multiple of 10.7 times its 2003-04 per share earnings of Rs 90.7.

Hindalco is a non-ferrous metals powerhouse, which has two key divisions — aluminium and copper. The key driver of earnings growth for the aluminium division will be sustained volume growth, better value-added product profile, strong international prices and reasonably good domestic demand.

Hindalco remains one of the lowest cost global producers of aluminium with fully integrated operations. This has helped Hindalco improve its PBIT margin by nearly 2 percentage points to 29.7 per cent in 2003-04. The stabilisation of Indal's (in which Hindalco holds 96 per cent equity) aluminium operations is expected to further strengthen the operational synergies between these companies.

For the copper division, the recovery of rates in Treatment Charges/Recovery Charges (TC/RC), robust export growth and low cost copper smelter expansion to 5 lakh tonnes proposed will augur well for the future. Copper has proved to be a drag on Hindalco's financial performance, with the PBIT margin declining by over 5 percentage points to 9.6 per cent in 2003-04. TC/RC rates, which had dropped by over 50 per cent in 2004, are likely to stage a recovery this year. Hindalco has already invested in two copper mines — Nifty and Mt. Gordon over the past year. This is also expected to meet 25 per cent of captive requirements for copper cathode production by 2005-06.

The risks to our recommendation are a sharp decline in aluminium and copper prices on account of the China factor, further drop in import tariffs on aluminium or copper in the forthcoming Budget and ambiguity over financing plans from a probable revival of the greenfield Aditya aluminium project.

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