Share Trading Tips

Company and Industry: Hindalco Industries Ltd. is primairly in the Aluminium and Copper Industry

CMP and PE Ratio: Rs. 57.25 with a PE ratio of 3.51

Financial Analysis:

Presented below is a table which shows the past five year performance for Hindalco Industries on several key financial parameters. The financials are for the consolidated entity.

Hindalco has shown robust topline growth over the past 5 years. The growth in 2007-08 looks particularly impressive because of the acquisition of Novelis Inc., a foreign subsidiary, acquired by the Company on 16.05.2007 through its wholly-owned overseas subsidiaries. With the acquisition of Novelis, Hindalco has also become the world’s largest rolling company.

* Hindalco has leveraged itself significantly in the last fiscal but the debt – equity position is still comfortable. The company has also expanded its equity base, which has affected the EPS in the near term. But since its for acquisition and growth related activities, its not a concern for shareholders.

* The company has been generating decent positive operating cash flows. This is a good thing for a company which has significantly leveraged itself. Positive operating cash flow ensures ample liquidity for working capital and other near term needs.

* The return on equity and return on capital employed for Hindalco has been affected in the near term because of the acquisition and significant expansion of equity base. In my opinion it will improve in the future with higher commodity prices coupled with robust performance by the company.

Near Term Outlook:

In the near term, revenue growth and bottomline for Hindalco will be under pressure in my opinion. The global economy will remain weak and the demand for commodities will not be robust. This will lead to decline in margins and also decline in topline for the company.

The two charts below show the same. For both Copper and Aluminium the prices have corrected sharply and global inventory level has gone up at the same time.

Long Term Revenue Drivers For Hindalco

While Hindalco has strong fundamentals it is important for investors to figure out what would drive the revenue for the company in the future. This in turn triggers a upmove in the stock price of the company. In my opinion some important factors driving revenue growth for Hindalco in the future would be:

* A significant rise in Aluminium prices

* A significant rise in Copper prices

* A significant rise in Gold prices (constituted 4.5% of company’s reveune mix in FY 2007-08)

So basically its the coming bull run in commodity prices which would act as a growth driver for the company. In my opinion whenever the world economy starts to grow significantly, there will be much higher inflation lead by commodities.

Aluminium consumption in India is low in comparison to developed and several developing countries. So when the this trend reverses there should be a significant surge in demand.

Hindalco is very well placed to capitalize on the future surge in commodity prices because of the following factors:

* With the acquisition of Novelis, the company has become the world’s largest rolling company. Novelis is the world’s largest manufacturer of aluminium rolled products and is the leader in Europe, Asia and South America.

* The Nifty Sulphide Copper Mining Project in Australia is the largest underground Copper mine commissioned in the last decade anywhere in the world. Copper is one commodity which will see huge demand in India and China in the next 10-15 years and even more.

* Hindalco’s brownfield expansions in Muri and Hirakud are expected to be commissioned this year and this will enhance enhance sales and EBITDA streams.

Conclusion:

* In the near term, volatility in commodity prices coupled with weak GDP growth will lead to volatility and downside in the stock price for Hindalco.

* In the long term, Hindalco should be a value creator. Investors looking at exposure to this stock with a 5+ year perspective should get good returns