Monday, March 12, 2012

Buy Hindalco Industries

InvestorZclub is recommending a buy on dips on Hindalco Industries in the region of Rs.130 to 135 for 1 year target return of at least 30%. Some of strong reasons for the recommendation are:

1. Trading at discount to current year FY 2012 Book Value. The FY-12 book value for the stock is expected to be Rs.165 while FY-13 book value should be at least Rs.175. The PE ratio for the current year is around 12 times.

2. The European subsidiary - Novelis which is cash positive but reports loss on net level is selling its loss making foil business in three countries which could bring it to green next year provided aluminium prices are supportive.

3. Copper inventory level in LME warehouses are at very low levels which should keep  copper prices buoyant (See the charts below).  Hindalco Industries is India's largest copper producer and produces around 3,40,000 tonnes of copper every year.

4. The US economy is showing very strong signs of pick up which should keep commodities buoyant while the news of china slowdown seems to be discounted in the metal prices specially aluminium which is down 20% since the start of 2012.

5. The stock seems to be taking strong support in 125 - 130 region. 52 week high low for the stock is 224 / 111.

Couple of concerns and risks ahead for the stock and the company are:

1. High Aluminium inventory levels in LME warehouses (See the charts below) could put further pressure on Aluminium which could in turn affect the company's profitability going forward. But better than expected recovery in US and rate cycle reversal in India, which could in turn increase demand for cars (large consumer of Aluminium), should help in supporting the price which is already down 20% since Jan 2012.

2. Sudden problem in European region could affect the demand for the products that Novelis make. As a result of which the numbers might turn bad for Hindalco Industries on consolidated basis.

Charts Courtsey:


  1. This comment has been removed by a blog administrator.

  2. The stock had fallen to 118 levels. Since your recommended price was 130 to 135, can it still be bought or there is some fundamental problem due to which the stock is coming down...

  3. Over the past year, shares of Hindalco have fallen 45 per cent compared to a 13 per cent fall in the Sensex. Hindalco’s underperformance has continued even over the past couple of months, a period when other metal stocks staged a recovery of sorts. Though the company reported better-than-expected numbers, the market believes there are no real triggers to support the stock price in the near term as greenfield projects are expected to see more delays.

    The company has shown an improvement in its operating profit in the fourth quarter, as both aluminium and copper volumes are up. The improvement is primarily due to improved realisations due to a better product mix, higher copper production and cost control. This has also helped the company shore up its bottomline. Its earnings before interest, depreciation, tax and amortisation has come in at Rs 860 crore, about 16 per cent higher than expected. The Street was expecting a standalone profit after tax of Rs 480 crore, but the company has clocked Rs 640 crore. Though this is down 10 per cent year-on-year, Hindalco has seen better aluminium volumes, improvement in the copper TC/RC (treatment and refining cost) and an increase in other income.

    While aluminium prices are expected to improve to $2,400/tonne in FY14 and Novelis is also expected to show an improvement in profitability, there are concerns over completion of projects. That the company has not shared details of project progress in the quarterly release, has also worried markets. CLSA says: “The company’s three greenfield projects — Mahan smelter, Utkal alumina refinery and Aditya smelter — have already seen delays of 9-15 months and we see risks of further delays. Hindalco was targeting commissioning of Mahan smelter in Q1 FY13 but is yet to achieve the milestone.

    Analysts also believe the company has reached the peak of its current capacity and growth will only come from new capacities. According to MFSL Research, given the ongoing delays in capital expenditure, sales growth will taper in the coming quarters.

    A report from business standard...

  4. The stock has come down to very attractive levels of 115. As mentioned above one year forward book value is somewhere around 175 which results in a PBV of just 0.65. The company has declared a dividend of Rs 1.55 which is 5 paise more than the previous year. However India's largest aluminium and copper smelter with KM Birla management available at 35% discount to book value is surely very attractive from long term perspective. Investors with 1 to 2 years horizon can keep accumulating the stock at lower levels.


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