Stock Insight: Tensile Strength

Hindalco Industries (Idirect Code: Hindal), the flagship company of the Aditya Birla Group, boasts of a dominant position in each of its two main businesses - aluminium and copper. It is the largest integrated aluminium and copper player in the country with a market share of over 40 per cent in each.

The company's fundamental strengths along with macroeconomic elements combined to deliver a strong performance for the second quarter running. Hindalco is in a position to reap the maximum benefit from the firm outlook in both aluminum and copper prices given its industry leader stature.

Aluminium:
Hindalco commenced operations in 1962, with a 20,000 tpa capacity at Renukoot in Uttar Pradesh and is a market leader. Its cost of manufacturing primary aluminium is $1100 per tonne, one of the lowest in the world. This cost competitiveness is mainly due to its integrated nature of operations and strategic control over key inputs such as access to bauxite reserves, coal and captive power generation

. The product range includes primary aluminium (42 per cent market share), rolled products (63 per cent), extrusions (20 per cent), foils (44 per cent) and wheels (31 per cent). HIL has launched several brands in the recent past - Aura (alloy wheels), Freshwrapp (kitchen foil) and Everlast (roofing sheets). Hindalco's share of high-value added products to total volume is close to 70 per cent. On an average, high-value added products command a premium of 36 per cent over the base metal.

The continued focus on such products has helped the company command higher realisations thereby improving its margins compared to peers. For the quarter ended September 30, 2006, production volumes were higher y-o-y in rolled products by 10.6 per cent, extrusions by 13.3 per cent, foils by 20 per cent and alloy wheels by 48.3 per cent.

Aluminium prices on the London Metal Exchange (LME) have surged by 42 per cent y-o-y from $1,810 per tonne to $2,565 per tonne in the first half of FY07. Prices are likely to firm up on buoyant demand. Global demand is expected to sustain its pace of 7 per cent growth this year with Asia's deficit expected to increase to 5.7 million tonnes by 2010 on accelerated spending in infrastructure and increased demand from the transportation and power sector. The aluminium business is expected to sustain its growth momentum and would do even better on the back of aggressive capacity expansion undertaken by it, which would boost sales volume. HIL is expanding its Hirakud smelter from 65,000 tpa to 143,000 tpa and power capacity from 167.5 mw to 367.5 mw. Simultaneously, it is also setting up an alumina green-field project in Orissa with a refining capacity of 15,00,000 tpa, smelter capacity of 325,000 tpa and power plant with a capacity 750 mw. This green-field project is likely to be commissioned in three years and has received SEZ approval. This would transform the company into a global sized player.

Copper:
Birla Copper, the company's copper division situated at Dahej in Gujarat, started with a capacity of 1,00,000 tpa in 1998 that steadily rose to 5,00,000 tpa by FY06. It is now the largest single location custom smelter globally.

The copper plant produces copper cathodes, continuous cast copper rods and precious metals like gold, silver and platinum group metal mix, sulphuric acid, phosphoric acid, di-ammonium phosphate, other phosphatic fertilisers and phospho-gypsum. The copper business witnessed a turnaround this year and has started contributing to profitability. Currently, it contributes around 47 per cent to the company's top line.

The company's copper mines division went through a difficult period over the last few years, caused by a longer- than-expected development phase resulting in higher costs and large accumulated losses. The company addressed the problem by commissioning the Nifty sulphide mines in Australia, one of the largest mine discoveries in past 10 years with a resource base of 6,85,000 tonnes and an expected life of 12 years. This helped the company turn around its copper business. The business is expected to contribute about 23-24 per cent to the group's EBIT in FY07E as against a negative contribution during the last three years. Copper prices on the LME have more than doubled to an average $7,466 per tonne against $3,579 per tonne in first half of FY07. Prices should remain steady on fears of disruption on the supply side. Copper demand is likely to remain steady, as the decline in usage from China will be offset by rising consumption in Japan and India, along with recovery in Europe.

The company registered its best ever results during the second quarter of the current financial year on the back of robust realisations and higher volumes for both metals.

Hindalco Indistries is expected to reap the benefits of the turnaround in copper business along with accelerated profitability from aluminium division on the back of firm prices and volume expansion. Where the latter is concerned, the company does face an execution risk towards massive expansion undertaken by it in the aluminium business with an outlay of nearly Rs 12,000 crore. Any delay in implementation of these projects can impact its earnings growth.

Moreover, the emergence of China as a major player in the global aluminium market could dent realisations and affect margins of the company in the long term.

This article was originally published on December 01, 2006.