Recommendation from Aluminium Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

HINDALCO INDUSTRIES ALL SET FOR A ‘METALLIC’ RISE 

HERE IS WHY
☛Dominant market position
☛Attractive valuation
☛Good growth prospects.

Hindalco Industries Limited belongs to Aditya Birla Group. The company is engaged in the production of aluminium and aluminium products as well as copper and copper products. With a consolidated turnover of USD 18.7 billion, Hindalco Industries is an industry leader in aluminium and copper. Over time, the company has successfully grown into a major vertically integrated aluminium company in the country and among the largest primary producers of aluminium in Asia. Its copper smelter is one of the world’s largest custom smelter at a single location. 

In the past Hindalco Industries has been one of the top five global aluminium majors with the acquisition of Novelis Inc., the world’s largest aluminium rolling company. Recently, it has become the world’s largest producer of value-added aluminium products after the completion of Aleris’ acquisition by its US-based wholly-owned subsidy, Novelis. With the acquisition of the US-based rolled products’ major, Aleris Corporation, Hindalco Industries has now become one of the largest aluminium companies in the world with a global footprint spanning 49 manufacturing facilities in North America, Europe and Asia.

Beyond its many strategic benefits, the acquisition will generate synergies and create a strong financial profile. Novelis’ beverage can business volumes should not be much impacted from the current pandemic as it is not a high-ticket purchase by consumers and hence might see decent demand. 

Hindalco Industries may also benefit from India’s sweeping reforms in the coal and mineral sector, which the government is trying to ease. This will reduce the regulation overhangs and help the stock perform better. For the quarter ended December 2019, the company’s gross sales decreased 12.09 per cent to Rs 29,197 crore in Q3FY20 from Rs 33,213 crore in Q3FY19.

Total expenses showed a decrease of 12.14 per cent to Rs 25,833 crore in Q3FY20 from Rs 29,402 crore in the same quarter last year. Among expenses, raw material cost for Q3FY20 stood at Rs 17,177 crore as against Rs 20,540 crore in the same quarter last year, showing a decrease of 16.37 per cent. Operating profit for Q3FY20 stood at Rs 3,661 crore as against Rs 4,081 crore in Q3FY19, showing a decrease of 10.29 per cent. Net profit for the period stood at Rs 1,060 crore as against Rs 1,393 crore in the same quarter last year, showing a decrease of 23.91 per cent. PAT margin for Q3FY20 stood at 3.63 per cent as against 4.19 per cent in Q3FY19.

The stock is trading at a PE multiple of 52.86x. It is trading at a significant discount with a PB ratio of 0.72x. With aluminium and copper demand getting back to better levels and the prices of these commodities increasing, Hindalco Industries has the potential of seeing good revenue growth as has been in the past few years. Aluminium prices are currently at USD 1,627 per ton and have been posting an upward trend since May this year – up almost 8 per cent – but they are still below the levels seen last year and far below the highs of above USD 2,000. Additionally, the acquisition of Aleris Corporation will help it add to the topline. By virtue of these factors, we recommend our reader-investors to BUY this stock.