Hidalco stock on the roll

The stock of Hindalco has been on a roll in the last three months, driven by recovery in aluminium prices and strong performance at Novelis, its US subsidiary. Analysts expect the stock to continue the strong performance in the medium term, driven by new initiatives in the domestic market and strong demand for Novelis products globally.

Novelis, a dominant player in beverage cans globally, has seen a turnaround, thanks to cost-cutting initiatives such as reduction in manpower by 11%, transfer of production facilities in Rogerstone to Hirakud in India and risk management for commodity pricing and forex risks. Its adjusted earnings before interest, tax, depreciation and amortisation (Ebidta) has improved from $53 million in Q4FY09 to $263 million in Q1FY10, the highest ever quarterly figure attained in company’s history. The subsidiary, which is expected to generate Ebidta in excess of $1 billion in FY11, may see further margin improvement on account of repricing of can contracts.

In India, Hindalco is investing heavily in capacity expansion of alumina, a key raw material for making aluminium, from 1.5 million tonne per annum (mtpa) to 3 mtpa in the next two years and that of final products from the current 0.6 mtpa to 1.4 mtpa.

This would provide an upside trigger to earnings as the company in its standalone India operations derives almost 80% of its profits from the aluminium segment. Hindalco is setting up expansion projects namely Mahan Aluminium, Aditya Aluminium and Utkal Alumina, all of them expected to be operational by Q3 FY12. Also, it is engaged in brownfield expansion at its Hirakud plant by Q4 FY12.

“Interestingly, the current stock price still does not factor in any of the expansion projects and upside to Novelis’ Ebitda from renegotiation of can contracts on remaining 30% of can volumes and capacity expansion from debottlenecking,” Credit Suisse analysts Anubhav Aggarwal, Neelkanth Mishra and Riya Bhattacharya wrote in a report on Monday. According to them, the stock could still have a decent upside if the above factors are taken into account.

The stock has also got support from improving commodity prices. The LME aluminium prices have seen recovery and are currently at around $2,350/tonne after hitting an intermediate low of around $1,900/tonne during June. Analysts expect the LME aluminium prices to remain stable in the near term.
“We forecast LME prices to remain range-bound between $2,100/tonne and $2,300/tonne, with a positive bias. Lower aluminium production in China during 2HFY11 due to government initiatives to reduce energy consumption is likely to support LME prices. Aluminium production in China is likely to decrease by around 4% in 2HFY11,”said Jimesh Sanghvi, analyst at Avendus India Equity Research.

The stock, which has gained close to 46% over the last three months, ended the day at its 52-week high close of `205.85 on the BSE. Analysts remain positive on the stock and one can look to buy on declines.