Hindalco: Novelis buy pays off

The markets are not known to reward managements for their long-term vision. In 2007, Kumar Birla faced the wrath of the stock market when he took a $6.2 billion call on Novelis, the Atlanta-based producer of rolled aluminum products. The markets questioned his assumption that more aluminum would be consumed by automobile, transport, electronics and cola companies.

He has been proved right three years hence. Not only are shipments up this financial year, Novelis expects transport and electronics sectors to be global demand drivers and clock 20-25 per cent growth in 2011, as developed markets revive. Rolled product shipments are up eight per cent year-on-year （y-o-y） in North America due to growth in can, automotive and industrial products. Europe has seen y-o-y volume growth of 10 per cent.

Novelis posted a net loss of $46 million, while the adjusted net profit was $52 million. The loss is mainly due to a one-time charge of $74 million for refinancing its $4 billion debt. Both Citi and Edelweiss Capital expect FY11 earnings before interest, taxes, depreciation and amortisation to be $1.08 billion as against the initial estimate of $1 billion.

If international operations have given traction in the finished products side, the company is on an expansion spree in India too. Hindalco is among the largest producers of aluminum in India with a capacity of 500,000 tonnes, with backward linkages in alumina at 1.5 million tonnes per annum and bauxite reserves of 65 million tonnes. The company is planning to increase alumina capacity five-fold to five mtpa and aluminum to 1.7 mtpa in the next five years with a total capital outlay of Rs 40,750 crore.

The greenfield phases of these projects, which are back-ended, are expected to come on stream in the beginning of FY12. Being one of the lowest cost producers of aluminum at $1,450 a tonne, Hindalco is well placed to capitalise on the growing demand for aluminum and value-added products. However, given that the company is in the metals space, it does face the usual risks that commodity companies do.