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Krishnan Thiagarajan

SHAREHOLDERS can retain their holdings in the Hindalco stock. Any decline in the stock price in line with the broad market can be used as an opportunity to take fresh exposure.

The firm trend in the international prices of aluminium, the rise in the treatment/refining charges (TC/RC) for copper in 2005-06 and the rising demand for non-ferrous metals in the end-user segments, are likely to bolster revenue and post-tax earnings growth.

Hindalco's strong balance-sheet places it in a comfortable position to bankroll its expansion plans.

The principal risk to our recommendation is the sustainability of international aluminium prices and the positive impact on contracted TC/RC in the coming year.

Besides this, the implications of a greenfield aluminium project in Orissa announced recently has not been factored into the recommendations as the financing structure is not known yet.

Hindalco operates primarily two segments: Aluminium and copper.

For the nine months ended December 31, 2004, aluminium accounted for 44 per cent of revenues and 82 per cent of profit before interest and taxes (PBIT). The copper segment accounted for the rest.

Robust aluminium...

The third quarter ended December 31, 2004 proved to a robust quarter for the aluminium segment. While the revenues rose 18 per cent to Rs 901.7 crore, the PBIT (profit before interst and tax) went up by 47 per cent to Rs. 335 crore over the corresponding quarter of the previous year.

The PBIT margin improved by 7 percentage points to 37 per cent, riding on the back of rising domestic prices and increased share of value-added downstream products such as rolled products and extrusions.

For the nine months ended December 31, 2004, the PBIT margins have improved by almost 5 percentage points at 34 per cent.

For FY 2005-06, the PBIT margins are likely to stabilise at these levels on account of two factors: One, the import tariff reduction from 15 per cent to 10 per cent in the latest Budget is expected to keep the domestic prices steady.

The pricing power of Hindalco will not diminish significantly as firm international prices are expected to keep a reasonable differential between landed costs and domestic prices in the near term.

Second, the integration of Indal with Hindalco is likely to expand the value-added portfolio of Hindalco in the downstream segment. The approval of the courts for the integration between Indal and Hindalco came through recently. As a consolidated entity, this integration has set the pace for expansion of capacity of the primary metal and alumina.

... .with catalyst in copper

While the revenues of the copper segment rose, the realisation was affected by the import tariff cuts for copper cathodes in February and July last year, the removal of export incentives, and the higher input costs.

In the third quarter ended December 31, 2004, the revenues rose by 26 per cent to Rs 1,143 crore, but the PBIT inched up by a mere 3 per cent.

The pressure on the PBIT margin continued with a 1.5 percentage point decline to 6.9 per cent. Reflecting the overall pressures in the copper business, for the nine months, the PBIT margin slipped six percentage points to 6 per cent.

In FY 2005-06, the copper segment is expected to have three triggers for growth. One, the indications of a cyclical recovery in the TC/RC rates. First signs are available in the mid-year rates negotiated at higher levels by the company compared to the previous year.

This suggests that Hindalco may be able to contract the annual rates at levels substantially higher than those of the previous year. This is likely to have a significant positive impact on margins.

Two, the company acquired two mines: Nifty and Mt. Gordon in Australia a couple of years back. The supplies from Mt. Gordon copper mine started this year and is expected to start from Nifty by the first half of 2005.

While supplies from these copper mines will take time to stabilise and improve margins, the step-up from the mines will steadily account for over 15 per cent of the total copper concentrate requirement.

Finally, the full impact of the copper capacity expansion to 2.5 lakh tonnes will be seen in the fourth and coming quarters. And the next stage of expansion in copper to 5 lakh tonnes is also likely to be commissioned by December 2005, offering a significant boost to volume growth in the medium term.

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