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Sunday, Sep 08, 2002

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Hindalco: Value for the medium term

Krishnan Thiagarajan

THE stock price of Hindalco Industries has been locked in a narrow band of Rs 560-600 over the past month. At the current market price of Rs 587, the stock is trading at a price earnings multiple of 7.7 times its annualised first quarter earnings of Rs 19 per share. The depressed prices of aluminium at the London Metal Exchange and higher input costs have cast a shadow over the financial performance of Hindalco in the quarter ended June 30, 2002. Even the announcement of the proposed merger with Indo Gulf Copper predicated on "size" and "greater combined balance sheet strength" has failed to enthuse the markets over the past month. However, considering the strong consumption growth in Asia and China and mild recovery in the US in the first half of calendar year 2002, it is likely that the international prices may stage a gradual recovery over the next couple of quarters. On this expectation, we recommend existing investors may stay invested, while investors with an investment horizon of at least a year may contemplate fresh investments.

Suitability: As the market sentiment continues to remain bearish, for investors seeking an investment in the commodity sector, Hindalco represents a fundamentally sound investment. Moreover, for those investors aiming to broadbase their investment portfolio, Hindalco continues to be a good stock to accumulate at current price levels with a medium-term perspective. Even though the broad economic variables present a mixed picture, it may be difficult to ignore the underlying resilience of the Indian economy. The performance of the Indian manufacturing sector is likely to get stronger, though it may take time to show up in the industrial production numbers.

Performance: For the first quarter ended June 30, 2002, Hindalco has recorded a 6.7 per cent growth in sales to Rs 586 crore. Even though the metal production volumes have gone up by nearly eight per cent in the first quarter of 2002 vis--vis the corresponding period of the previous year, the fall in the average LME prices by over 9.7 per cent during this period has pegged down overall revenue growth. The operating profit margin has declined sharply to 38.7 per cent on account of a sharp rise in input costs and manufacturing expenses. This, along with a modest rise in depreciation charges has contributed to a decline in post tax earnings by 13 per cent to Rs 140.2 crore. Since the aluminium prices have continued to dip in the months of July and September vis--vis the average prices in the first quarter, a recovery in financial performance may take longer to materialise.

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