Moving With A Metallic Shine

After a close assessment on various fronts, we are recommending Hindalco as a ‘choice scrip’ to our readers. The compelling factors include strong financial performance for Q1FY10 where not only the realisation has been better but with cost-cutting initiatives the margins have also improved. The company’s sales volumes are slowly picking up and we expect that better economic conditions in the next 2-3 quarters will result in further upward movement. Thus, the traction on account of better prices, better volume mix and lower cost is expected to improve the earnings of the company. Further, with improving economic conditions, and the modestly improving cash flows of Novelis (though gradually), the long-term future prospects of the company appear to be promising.
On the valuation front, the EV/EBITDA on a consolidated basis is at 7.50x which may look on the higher side. But one should remember that it’s a Birla Group company and hence deserves such premium. Currently, on a stand-alone basis the CMP of Rs 106 discounts its FY09 earnings by 9x and on consolidated basis discounts its FY09 earnings by 14.40x. Considering all these factors we recommend investors to buy the scrip at current levels with a target price of Rs 135 in the next one year.
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Hindalco has an integrated capacity of over 5,00,000 tonnes of aluminum representing close to 40 per cent capacity in India. For copper, Hindalco operates a 5,00,000-tonne smelter which accounts for about 50 per cent of the domestic capacity. Since October 2008 the aluminium and copper prices have witnessed a sharp fall. The impact of the same was visible in the results as realisations dropped significantly during the period. But since the last six months prices of aluminium and copper have increased significantly helping the company post better results in Q1FY10. While aluminium prices increased to USD 2,000 per tonne from USD 1,200 per tonne in February 2009, copper prices have also moved up by more than 90 per cent. Meanwhile, the financial performance may not look good at first glance since the company has posted a drop in topline as well as bottomline on a YoY basis. But one should look at the results on a QoQ basis where the realisations have improved. For Q1FY10 it posted a topline of Rs 3,899 crore (up 3 per cent on QoQ basis) and bottomline of Rs 481 crore (up 79 per cent). Going ahead, the scenario seems to be looking good for the company as aluminium prices are expected to be sustained at current levels. The global as well as domestic markets are showing signs of improvement. Additionally, Novelis has also put in good Q1FY10 results where it posted a bottomline of USD 125 million as compared to USD 7 million in Q1FY09 and a loss of USD 19 million in Q4FY09. With global prices expected to sustain at current levels Novelis is also expected to do better and hence the consolidated performance of the company will improve.

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The company is now undertaking a few greenfield as well as brownfield expansions. Where it will at another 1128600 MT by FY12. To enable this, the company is raising Rs 2,400 crore through a QIP or GDR issue. As mentioned earlier, the financial performance of the company has been good for Q1FY10 and is expected to improve further in the next two three quarters. Considering these factors, our recommendation to investors is to buy the scrip at current levels with a target price of Rs 135 in the next one year.