sunil kajaria report hindalco 29th oct 2011

8/3/2019 Sunil Kajaria Report Hindalco 29th Oct 2011

1/22


2/22

INTRODUCTION

Based on perspective, there are many possible answers to the questionWhatexactly is Aluminium? Is aluminium:

A vital industrial ingredient which goes into millions of physical products

around the globe. Are industry leaders right in predicting growth to thetune of 5-6 % p.a. for the next decade or more driven by urbanization,modernization of infrastructure, enhanced substitution from othermaterials, and sustainability?

PROJECTED GROWTH IN VARIOUS FRP END-USER SEGMENTS 2010- 2020

An industrial commodity facing a rapid increase in energy ledmanufacturing costs, and these days cynically referred to as FrozenElectricity. Is industry giant Rio Tinto Alcan correct in its recent decisionto explore a divestment of 6 Pacific assets a mere three years afteracquiring Alcan?


3/22

A metal which has left its worldly avatar as a physical good behind andbecome relevant mainly as a Risky Asset, part of a basket of othercommodities like silver & crude. Is it its destiny to be part of that GreatTrade Short U.S. Dollar, long All Risky Assets - being played out byhundreds of hedge funds, commodity traders and sundry financial

institutions around the world? Will it rediscover its industrial roots andfight back the increasing financialization that it now faces?

Clearly, there is an element of truth in every one of these statements. Aluminiumis all of the above and more. What applies to beauty also applies to Aluminium It is very much in the eyes of the beholder A low cost integrated producer of themetal has a very different outlook as compared to a bauxite and energy -restrained manufacturer. In turn, industry-wide concerns are of no consequenceto a financial institution that may be holding a large long or short position on theLME. The next U.S. $200 move in price is all that matters.

This report will examine the strategic outlook and competitive position ofHindalco Industries Ltd. (HINDALCO) against this complex backdrop. Theintention is to provide a meaningful qualitative analysis of the companys longterm prospects and opportunities. Accordingly, we will look at the domesticaluminium business based on issues such as pricing power, substitutes, financialparameters, short-term & long-term advantages, growth prospects & drivers, IPR,entry barriers, and risk factors. The report will also try to analyze the impact ofvarious operating and environmental issues relating to technology, exchangerates, govt. regulations, and tax structures.

Such a broad and exhaustive analysis becomes especially imperative given the

size and scope of Hindalco operations, as well as the multiple opportunities andchallenges faced by the firm.

LAST 3 MONTHS - PRICE VOLATILITY ON LME EVEN THOUGH PHYSICAL DEMAND ROBUST


4/22

PART A

A) Does the company dominate its market segment? Does it have any particularpricing power in its segment?

The Indian primary aluminium market is oligopolistic in nature with three entities Hindalco, state-run Nalco & private-sector Vedanta group (consisting of Balco,Vedanta Aluminium (VAL), and Malco) controlling almost the entire domesticproduction.

FY11 Aluminium Production (Ktpa)

538

450

655 Hindalco

NALCO

Vedanta

The three producers have different product mixes, with Nalco concentrating onalumina exports in a major way, Hindalco focusing on value added products(almost 50% of the volume mix), and Vedanta functioning as a plain vanillaprimary producer. Operations are quite integrated for all 3 manufacturers, withcaptive power common across the board. Nalco enjoys almost full bauxitecoverage, Hindalco operates at a 70:30 mix, and Vedanta is currently relyinglargely on external Bauxite due to MoEF issues at Niyamgiri.

Hindalco & Nalco have similar cost profiles in the US$ 1500-1600 range (amongthe top 25% of smelters world-wide), whereas Vedantas cost of production ishigher at approximately US$ 1800 due to VAL bauxite and alumina issues(Balcos COP is competitive and in the same range as Hindalco & Nalco).

Pricing is linked to the landed cost of imports and all players are solidly profitableat current level of pricing.

ANALYSIS: Aluminium prices in India are largely linked to the landed cost ofimports. There is very little price competition amongst the domestic players.There exists a tremendous gap between Hindalcos cost of production and import

prices and hence, aluminium margins have almost always been in excess of 25%of EBIT. In the foreseeable future, pricing issues are unlikely to impact Hindalcoin any meaningful manner.


5/22

B) Are there any easy substitutes for the companys products? Are imports aconcern (either of similar or substitute products)?

Because of its conductivity, flexibility, light weight, recyclability, and anti-corrosiveproperties, aluminium is used in thousands of industrial and consumer

applications.

It can act as a substitute for both copper & steel depending on the application. Inrecent years, copper prices have risen at a far faster clip than aluminium pricesand this has led to substitution in various products like low voltage electricalwiring and cable, building facades, heat sinks etc. Industry estimates show that ifpast price trends remain constant, there exists a potential for approx. 4 milliontpa of substitution of copper.


6/22

Similarly, aluminium is making significant inroads as a steel substitute asdemand for light weight drive a huge upsurge in automotive, aerospace, andconstruction related applications.

The percentage of aluminum in cars in the western world has been slowlyclimbing for decades from 2 percent in 1975 to a projected 10 percent in 2020.The more aluminum supplants steel in the manufacture of cars, the more light-weighting can be achieved.

Moreover, this percentage may be nearing a tipping point. It is quite possible that10 years from now, rather than looking at a continuation of this incremental


7/22

increase, the industry may see a sharp hockey-stick turn in the next few years,making the current projections of demand look very conservative.

This trend would, of course, have a far bigger impact on Novelis, but Hindalco,too, as a manufacturer of 1.8 mtpa (post 2015) would benefit from this enhanced

source of demand.

ANALYSIS: Substitution is a real opportunity for Hindalco. Of the 3 majors, it isthe only one with a meaningful domestic presence in aluminium products.Internationally, its 100% subsidiary Novelis is the world leader in FRP products.

As the Indian market for aluminium products deepens, it should benefit

disproportionately. The relocation of the Rogerstone, UK can stock plant toHirakud is a strategic initiative to exploit this move.

C) Does the company have any unique attribute which may be of significance toits short term /long term advantages?

The acquisition of Novelis provides a unique strength to Hindalco as compared toits domestic competitors. Amongst the 3 main players, Hindalco is the only onewith a meaningful presence in value-added products and the Novelis acquisitionensures that this focus on the value-added segment will get carried forwardfurther.

The can stock plant at Hirakud (transferred from Rogerstone, UK) is expected tostart operations by end-2011. Initial capacity will be 130 ktpa, and will geteventually scaled to 500 ktpa. This plant should play a crucial role in expandingthe entire aluminium products range in India, and spur newer applications.

Moreover, as Indian GDP growth continues in the 7-8 % p.a. rate, the aluminiumindustry can expect to benefit directly in the following two ways:-


8/22

1) Urbanization is a key driver of aluminium adoption. Cans, cars, electronics,buildings, food packaging etc. will also see much greater usage as the trend ofpopulation migration continues in conjunction with economic growth

2) There is a direct correlation between aluminium consumption and GDP percapita. As the graph below indicates, Indian consumption is miniscule ascompared to even China, leave alone the developed world. The anticipatedgrowth in Indian demand is well in excess of 10% p.a. and Hindalcos increase incapacity (both primary and value-added) looks like it is well timed to takeadvantage of this trend.


9/22

ANALYSIS: Hindalcos unique focus amongst domestic players on value-addedproducts should serve as a real competitive advantage going forward. The Indiandomestic aluminium market can be expected to continue to grow at 10-12 % p.a.due to two mega-trends Increased Urbanization & Increased GDP, and thisgrowth will translate into a much larger portfolio of aluminium based products, an

area of dominance for Hindalco.

D) Does the company have any unique attribute which may be of significance toits short term /long term disadvantages?

As a fully integrated player, the company does not suffer from any uniquedisadvantage relative to its peers. Similar to the Vedanta group, the companyhas been experiencing some delays due to MoEF concerns (coal linkage atMahan Smelter Project). It is also facing issues relating to coal shortages & highprices due to its dependence on Coal India for coal supplies.

These concerns, while serious, are not of a nature unique to Hindalco and arebeing experienced by all companies currently setting up large projects in India.

ANALYSIS: There are no features uniquely disadvantageous to Hindalco. Similarto other companies executing large projects in India, issues like delays inenvironmental clearance, land acquisition, general delays etc. are a concern forHindalco also. The company has an ambitious expansion programme in handand the timing of the same is tightly synchronized with the expected growth of thealuminium industry. Hence, it is quite important that Hindalco is able to executeits projects within its established time-frame.

E) Where is the product placed in its lifecycle? What strategic steps has the

company taken to indicate that it has a clear vision of managing the companythrough the product lifecycle?

As examined in C) above, aluminium consumption is directly co-related toGDP/capita. The synchronization of Hindalco capacity enhancement (bothprimary and value-added) with the Indian GDP growth story should ensure thatHindalco is well placed to take advantage of the expected growth in alumniumconsumption and remain the market leader. While the Vedanta group also hassimilar capacity additions planned, they do not have the presence in value-addedproducts or the cost profile to match Hindalco. As per industry sources, after bothcompanies have completed their expansions, Vedanta cash costs will be in the

2nd or 3rd quartile (depending on bauxite sourcing) whereas Hindalco will continueto remain in the top quartile of aluminium smelters world-wide.


10/22

HINDALCO - CURRENT & PLANNED CAPACITIES

REFINING INTO ALUMINA

Plant Location Current Brownfield Greenfield Total Commission

Capacity Expansion Expansion Date

Renukoot Eastern U.P 685000 0 0 685000

Muri Jharkhand 450000 0 0 450000

Belgaum Karnataka 259000 224000 0 483000 n.a.

Belgaum** Karnataka 91000 76000 0 167000 n.a.

Aditya Alum. Orissa 0 0 1500000 1500000 Jun-14

Utkal Alum* Orissa 0 0 1500000 1500000 Jun-12

1485000 300000 3000000 4785000

** High Value Special Alumina at Belgaum, largely exported.

*** All figures are in tpa

SMELTING INTO ALUMINIUM

Plant Location Current Brownfield Greenfield Total Commission

Capacity Expansion Expansion Date

Renukoot Eastern U.P 410000 0 0 410000

Hirakud Orissa 155000 58000 0 213000 Jan-12

Bargawan Mahan (M.P) 0 0 359000 359000 Dec-11

Aditya Alum. Orissa 0 0 359000 359000 Mar-13

Sonahatu Jharkhand 0 0 359000 359000 Jun-15

565000 58000 1077000 1700000

While not detailed above, Novelis too is undergoing FRP capacity expansionfrom 3 mtpa currently to 4 mtpa by 2016.

ANALYSIS: Economies like India and Brazil are expected to follow China andadd significant incremental demand for aluminium. To underpin this growth,greenfield investments in refining and smelting capacity will be required. Themain driver for refining is size, quality & proximity of bauxite reserves, and themain driver for smelting is competitive power, either through coal linkages or coalsupply. Hindalco has undertaken a large and cost-effective expansion and timelycompletion of the same will serve it well for the unfolding demand scenarioahead.

F) What are the growth drivers which will fuel the industry in the next 5-10years?

As the graph below illustrates, aluminium has had one of the strongest demandgrowth stories of all the commodities over the last 10 years. Due to its significantadvantages of light weight, flexibility, and recyclability, one can expect thisgrowth in the next decade as well. Increased substitution and enhanced productapplication portfolio should ensure 10-12% domestic and 5-6% internationalgrowth.


11/22

ALUMINIUM DEMAND GROWTH HAS EXCEEDED ALMOST ALL OTHER COMMODITIES

The domestic demand situation over the next 5-10 years has already beendocumented in earlier sections. Here, we will examine the Chinese impact on theglobal industry and its possible implications for Hindalco.


12/22

Chinese production has seen the strongest growth over the last decade and nowaccounts for almost 18mtpa of primary aluminium production (40%) as comparedto 26 mtpa for rest of world (ROW).

However, this breakneck growth has led to some serious repercussions. There

are several China related issues faced by the industry:

The global aluminium industry has become hugely reliant on Chinesealumina supply/demand. Alumina prices too, are threatening to break-away from their historical LME linkages

Due to lack of bauxite resources as well as high electricity costs, Chinesecost of production is much higher than global averages (average cost inChina is currently estimated at US$ 2600/tonne). Hence, Chineseproduction is largely uneconomical (The right outcome for industry wouldhave been the development of greenfield refineries in low operating costlocations, rather than high marginal cost Chinese production with unknown

sustainability).

The main implications of the above are i) huge price volatility. LME prices havealmost become hostage to the Chinese hard landing story and no respite canbe seen in the immediate term. ii) The longer term issue of Chinese productioneconomics remains a stumbling block. Will aluminium see a shift in productionaway from China and into areas like the Middle East, Russia & India or will it staythe same sub-economic production in China combined with lack of newcapacity in ROW.

Hindalco will be producing almost 1.8 mtpa of primary aluminium by 2016.

Hence, these global trends of high volatility and uncertainty of Chinese demandand supply do affect its strategic outlook going forward. However, the cost ofproduction differential is a great source of comfort and it seems more likely thataluminium on the LME will follow an upward trending path in the future as highChinese cost of production provide a long-term floor.

ANALYSIS: Chinese demand and supply issues will play a crucial role indetermining aluminium prices over the medium term. For Hindalco, these issuesseem to be less of a concern due to significantly lower cost of production, strongdomestic focus, and almost 100% back-ward integration. If Chinese productionstagnates / falls over the longer term due to cost of production issues, there

could even be a large export potential for Hindalco. This suggests a strategiclook at Rio Tintos proposed sale of smelting assets as Hindalco will have almost1.2 mtpa of surplus alumina, post expansions.

G) Are there any serious IPR based entry barriers or growth drivers for thiscompany? Does this company lead the industry in R&D and IPRdevelopment?


13/22

Intellectual Property Rights do not seem to be much of an entry barrier or growthdriver for Hindalco or the industry at large. The technology is well developed andeasily available. Rather, issues like land acquisition, mining rights, capital costs,extensive project delays are the main barriers to entry.

ANALYSIS: Hindalco is one of the 3 companies operating in the domesticaluminium space. There is almost no threat from new entrants due to multiple problems faced in setting up greenfield capacities. Hindalco had already madethe strategic choice to focus on aluminium 3-4 years ago and is now in the finalstages of a major expansion in aluminium capacity.

H) Is the company growing faster than the market as a whole? What growthattributes will allow the company to out-compete its peers? This analysisshould be considered with specific regard to industry dynamics.

Hindalcos domestic sales growth over the last 5 years has been in line with the

industry as a whole. In the past, capacity additions were incremental in nature,mainly through brownfield expansion at Hirakud and asset sweating at Renukoot.New additions are in the final stages of fruition and total primary capacity willmove up from 565,000 tpa in 2011 to 1,700,000 tpa by 2016. The next 5 yearswill see a steady increase in aluminium production and sales as Mahan comesonline by Dec-11, followed by Hirakud (Jan-12), Aditya Aluminium (Mar-13) andSonahatu (Jun-15).

The difficulty in setting up large integrated aluminium capacities in India cannotbe overstated. Though the Vedanta group has a similar growth planned, theircost profile is not comparable to Hindalco. Nalco has chosen to explore overseasopportunities rather than domestic expansion and its market-share will shrinkover the next 5 years.

ANALYSIS: Hindalco & Vedanta are both on the verge of substantial capacityaddition. Both companies will out-compete Nalco in the domestic markets butHindalco is expected to be a bigger beneficiary than Vedanta due to its superiorcost profile and its exclusive focus on value-added products.

I) What factors could turn out to be a source of risk for the companys growthprospects. These factors should be company specific and industry or countrywide

> Project related delays have become the major issue being faced by Hindalco.Indeed, in its investor presentation of 31st May 2011, Hindalco put up thefollowing graphic as a description of project related issues being faced by it:


14/22

> Funding risks are not considered to be material as the company has beenproactive on this front. Adequate capital has already been raised throughcombination of rights issue, capital repatriation from Novelis, and debt tie-ups forMahan & Utkal. The company has recently seen a credit upgrade to AA+.

> As a commodity player whose sale prices are directly linked to the LME, pricevolatility can be considered as a source of risk. However, competitive cost ofproduction, forward integration into value-added products and the China floor allprovide a high degree of comfort.


15/22

The above graph illustrates the operational resilience of the company as itsremained EBITD positive through the Lehman crash (Q2FY09 onwards) even asLME prices took a complete nosedive.

> Regulatory risk has emerged as a risk to the sector as a whole. The sharp run-

up in commodity prices have led to more and more calls for sharing the wealthwith local communities. Legislation such as the Mines and Minerals Development& Regulation Bill (MMDRA) 2011 is currently under enactment and will impact thecost of vital raw materials like coal and bauxite. Apart from cost, there is aheightened awareness of ownership of these vital minerals and states/countriesare increasingly disinclined to give mining rights to private companies. Hindalcois quite exposed to this risk as it continues its expansion drive.

ANALYSIS: Project delays, price volatility, funding, regulation and environmentare the key risks being faced by Hindalco. The first three are largely undercontrol but regulatory and environment related risks will be the key risks that

have definitely increased and which Hindalco have to traverse successfully.J) How affected is the company by govt. regulations and duty/tax structures

Examine with respect to pricing, markets accessibility, ongoing regulation,profitability, entry barriers, competition from govt. owned companies etc.

Despite the regulatory risks on the projects side, the company is relativelyinsulated from govt. regulations and duty/tax structures on the operational side.Pricing, as mentioned before, is largely determined on an import parity basis andcustoms duty is already at a rock-bottom 5%. Hence, there is little risk on theimport duty front.

Ongoing regulation currently acts as an entry barrier as it has become virtuallyimpossible for new players to set up greenfield capacities.

Though the company competes directly with state-owned Nalco, there is virtuallyno head-to-head competition as both companies price their products based onimport prices.

The company is dependant on state-owned Coal India for a large portion of itscoal supplies and is exposed to energy price risk from this entity.

The MMDRA 2011 Bill, if enacted, will also lead to greater costs in bauxite

procurement, both from captive mines and outside.

ANALYSIS: Though not as much as on the projects side, Hindalco is facingrising regulatory risk on the operational side. Mining, environmental impact,energy inputs all have substantial government interface, and Hindalco will haveto devote greater management and financial bandwidth in order to manage theserisks.


16/22

PART B

K) Comment on the companys financials?

Due to the steady improvement in Novelis operations, Hindalco (consolidated)saw a 24.93% increase in adjusted EBITDA from 6,983 Crs in FY10 to 8,724 Crsin FY11.

CONSOLIDATED FINANCIAL PERFORMANCE (FY11 compared to FY10)

On a stand-alone basis, FY11 showed a 22% increase in adjusted EBITDA as

compared to FY10 (3,502 Crs as compared to 2,861 Crs).

STAND-ALONE FINANCIAL PERFORMANCE (FY11 compared to FY10)


17/22

The companys aluminium business has been a steady performer and EBITmargins have averaged 25.61% over the last 9 quarters. The best quarter wasQ1FY10 at 32.06% and the worst quarter was Q2FY10 at 15.71%. The keypoints to consider are that a) The business is consistently profitable in all types of

market conditions and LME volatility and b) EBIT margins have sustained in theface of higher energy costs and subsequent cost push. This implies that thecompany does not yet have any difficulty in passing costs onto consumers.

Aluminium Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

Business

Net Sales (Crs) 1419 1649 1884 2037 1867 1911 1977 2211 2093

EBIT (Crs) 455 259 438 614 552 424 465 562 599

Margin (%) 32.06% 15.71% 23.25% 30.14% 29.57% 22.19% 23.52% 25.42% 28.62%

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q

1FY12

EBIT (Crs)

0

500

1000

1500

2000

2500

EBIT & NET SALES - ALUMINIUM

EBIT (Crs)

Net Sales (Crs)

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

0.00%

5.00%10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

QUARTERLY EBIT MARGIN (%)


18/22

The company is strongly capitalized with FY11 net-worth at US$ 6.4 billion (upfrom 4.6 billion in FY10). Liquidity at Hindalco (domestic) is at US$ 1.3 billion andNovelis is at US$ 1.1 billion.

The company seems to be significantly undervalued on the markets as is evincedby the table below. The market cap is at `24,000 Crs currently and the estimatedvalue of Novelis (based on 7X FY12 EBITDA is at ` 22,000 Crs). This wouldimply a market cap of a mere ` 2,000 Crs for the entire stand-alone aluminumand copper business.

This could potentially be an area of concern if the company were required toraise fresh resources in the event of an M&A transaction. Possible remediescould be a share buy-back, disinvestment of a stake in Novelis or disinvestmentof other equity investments.

Anamoly in Valuation

Current Stock Price (Rs) 125

Curent Equity (Crs) 191.46

Market Cap (Crs) 23933

Novelis EV (7X Adjusted EBITDA FY12) (Crs) 42000

Less: Novelis Net Debt (Crs) -20000

Net Value of Novelis (Crs) 22000

Net Implied Value of Hindalco Standalone (Crs) 1933

ANALYSIS: While a full-fledged financial analysis is beyond the scope of thisreport, it is clear that Hindalco is a financial strong entity with a net-worth of US$6.4 billion and liquidity of US$ 2.4 Billion. The company has already tied up debtfor Mahan and Utkal and financial restructuring undertaken at Novelis duringFY11 has reduced Hindalcos investment to a mere $2 billion. However, thecurrent market cap of the company is grossly inadequate given the impliedvaluation of Novelis and this could be dilutive for existing shareholders and

promoters if fresh funds are required to be raised.

L) Has management demonstrated adequate ability in the previous 5 yearperiod? Examine with respect to diversifications/product portfolio/market

penetration & other relevant issues

4-5 years ago, the Hindalco management took a very committed strategic viewon the aluminium business and concentrated its resources on a 3X capacityaddition. This move seems likely to pay off handsomely as new capacities comeon stream at a time when the domestic aluminium business continues to grow at12-15% p.a.


19/22

Unique in the industry, Hindalco has maintained a strong focus on value-addedproducts. By contrast, Vedanta has tried and failed in this segment (through its ill-fated acquisition of India Foils) and Nalco has never shown any interest inaluminium products. This focus will be a huge source of competitive advantagefor Hindalco going forward as the aluminium products market deepens in India.

Novelis, too, is a major source of competitive advantage. Though much deridedat the time of acquisition, it is now a solidly profitable operation in its own right(US$ 1.2 Billion EBITDA projected for FY 2011-12) and combined with stand-alone domestic operations, transforms Hindalco into a global end-to-endintegrated aluminium powerhouse. Its ongoing brownfield expansion to 4mtpashould get completed by 2016 and will ensure that Hindalco enjoys globalleadership in FRP.

Management has also taken pro-active steps in streamlining the copperbusiness. Capacity has been kept fixed at 500 Ktpa and efforts are on to

maximize returns through enhancements in operational efficiency, greateremphasis on value-added products like sulphuric acid and DAP, increasedrecovery of copper and selenium, and focus on end-user segments likeautomotive and housing wire. Management has also indicated that they are onthe lookout for more copper mines (similar to ABM in Australia).

ANALYSIS: It has been a five year effort on the part of Hindalco management toposition the company as a global, fully- integrated, low-cost aluminium producerwith a leadership position in value-added products. Barring any global shocks,the company is well positioned to ride the next cycle in aluminium. Additionally,due to its end-to-end capabilities, the company will be at the forefront when itcomes to new opportunities in the M&A space. Over the next few years, it is likelythat a number of aluminium assets will come up for sale globally, and Hindalcowill be in a position to pick and choose these assets and further consolidate its

position in the industry.

M) What is your view of the current ownership pattern of the company? Does itprovide stability to the company?

The companys equity base of `191.46 Crs (Face value `1/-), is widely heldamongst all classes of investors. Promoters (the A.V. Birla Group) hold 32.06%,FIIs are quite active with a 28.24% holding, and DIIs, corporate bodies and theretail public make up the rest of the shareholder base.


20/22

Share-Holding Pattern Sep-11

32%

28%

14%

26%

Promoters

FIIs

DIIs

Others

In the recently concluded AGM, promoters have indicated that they are interestedin hiking their stake in the company.

ANALYSIS: Given the flagship nature of the company, the current shareholdingof the promoter group (32.06%) is definitely on the lower side. Hindalco & Noveliswill play an essential role in the groups expansion plans and it would bereasonable to expect an increase in the promoter stake going forward throughthe creeping acquisition route.


21/22

CONCLUSION

The purpose of this report is to provide a meaningful qualitative analysis of thelong term strategic outlook for Hindalco Industries Ltd.

Analysis of the company shows that it ranks high on the following attributes:a) Ability to dominate market segment b) Lack of credible product substitutes c)Little threat from imports d) Differentiated focus as compared to peers e) Costleadership in primary aluminium production f) Well-timed expansion in sync withglobal consumption trends g) Relatively low levels of risks to growth h) Highbarriers to entry i) M& A opportunities arising due to ongoing globalconsolidation.

Areas of concern for the company include:a) Increased government & environmental regulation leading to project delays b)Cost pressure on raw materials like bauxite and coal due to govt. regulations andpolicies c) Pricing is linked on LME and suffers from high volatility due toincreased financialization d) Low discounting on the bourses. Financial analysisreveals that the Hindalco stock is quite undervalued and this could potentiallyhave adverse effects if and when it undertakes any M&A activity.

Keeping the above in perspective, Hindalco presents itself as a well-managedaluminium company with significant sustainable competitive advantages.Management has taken the necessary steps to build on these advantages and

the company is poised to become a global aluminium powerhouse. The ongoingconsolidation in the industry and the China Factor should throw up additionalopportunities in the M&A space and Hindalco clearly has the bandwidth to exploitthe same.


22/22

SCORING

Part A -

ATTRIBUTE A B C D E F G H I J TOTAL

MAX. PTS 5 5 5 5 5 5 5 5 5 5 50SCORE 4 5 4 4 5 4 5 4 3 3 41

Part B -

ATTRIBUTE K L M TOTALMAX. PTS 20 25 5 50SCORE 17 20 4 41

Final Score = PART A 41 + PART B 41 = 82

Benchmarks:1) Superior Companies / Products/ Business Opportunities have a combined score of at

least 60 with PART-A & PART-B individually scoring 30 points each.

sunil kajaria report hindalco 29th oct 2011

Documents