Hindalco to continue expansion despite weak market

Aluminium prices have crashed from $2700 to $1700 per tone in a gap of 15 months, input costs are rising, so are fuel costs, but Hindalco Industries Ltd is on the verge of a massive expansion plan.

Is the expansion plans justified? “When Hindalco planned this massive expansion, the foreseen scenario was not gloomy as it is currently. The projects have faced several hurdles, especially in the past two years,” according to Angel Broking which has giving a neutral rating for Hindalco stock.

Hindalco is investing heavily in greenfiled and brownfield projects.

Its green field projects are :

- Mahan Aluminium project in Madhya Pradesh, a smelter power plant with 359 kpta alumina smelter , 900 MW captive power plant. The project has access to Mahan Cola block through a JV with Essar Power. Hindalco’s share is 3.6 mn mtpa.
-Aditya Aluminium & Alumina Project in Orissa: 4.2 mn tpa bauxite mine, 1.5 mn tpa aluminum refinery at Kansarigud, 359 Kpta smelter at Lapanga,, land acquired,important clearances received, 20 mtpa JV coal mine at Ib valley. Coal blocks at Talbira II & II. 900 MW captive power at Lapanga
-Orissa Utkal Alumina project 1.5 mtpa alumina refinery at advanced stage
-Jharkhand Alumina Project- Aluminium smelter plant- 359 Kpta- 900 MW, captive thermal power plant; JV with Tata Power –owns a coal mine -6 Mtpa
Its Brownfield project :

-Hirakud smelter project expansion from 30 Kpta to 155 Kpta
-Alumina Capacity at Belgaum to catapult Hindalco to second highest producer of specials in the world. Specials alumina production to be ramped up from 138 Kpta to 316 Kpta.
-Alumina Capacity: Muri to be ramped up from 110 Kpta to 450 Kpta—Cogen plant capacity raised from 9 MW to 300 MW in 2008.

It is not unusual in mining and metals industry to abandon business when market situation goes adverse. It has happened before in gold, silver and rare earths when drop in prices and profits forced miners to stop mining further.

On the other hand, cash rich companies who can hold on and continue expansion when markets are adverse stand to profit handsomely when situation turns favourable a few years hence. Setting up smelters, power generation facility, bauxite production facilities can take a lot of time so that a company which hopes to expand a project when markets turn favourable may miss the bus altogether.

Hindalco believes that its strength lies in being an integrated aluminium producer- from bauxite, to primary aluminium, special alumina to rolled aluminium with its acquisition of Novelis in 2007. This is also reinforced in Angel Broking’s analysis on Hindalco: “.. we are structurally positive on its integrated capacities. However, low aluminium prices, rising costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth in the next two years."

Hindalco believes Indian bauxite is of the highest quality — it is Gibbsitic bauxite with high alumina content, less than 2 per cent Boehmite content, a very low reactive silica content and negligible organic content. It has higher liquor purity and productivity, which is more cost efficient.

India also has large deposits of bauxite that can be found in a single plateau, allowing for more efficient extraction. “India also has abundant coal supplies, easy availability of labour and is located in close proximity to the fast-growing markets.

Captive bauxite mines that provide the highest quality bauxite and a refinery located near the mine, state-of-the-art technology and economies of scale further enhance our cost advantage,”according to Hindalco.

Even though aluminium industry is in crisis the India government owned Navartna company, National Aluminium Company Ltd had posted a net profit o fRs 849.50 cr down 21% over previsou year’s 1069.30 cr while sales turnover was up 9% at Rs n5958.98 cr. “The results would have been still better but for the impact of rising fuel cost and increase in price of input materials. The rise in sales turnover is mostly attributed to better market realizations, in addition to higher production and sale of alumina, NALCO said.

Aluminium market is set for recovery in 2013-14 according to some analysts. Aluminium use in automobile industry is set to rise in European and US markets as regulation on reduced carbon emissions forces companies to lower the weight of vehicles by utilizing more aluminium.

According to Aluminium Association of India, aluminium has come a long way from late 1880's when it was first commercially produced to beocme the second most used metal in the world apart from most recycled metal, making investments in this 'grey gold' quite attractive.

Angel Broking has cited delays in getting clearances for Greenfield projects of Hindalco and cost overruns to impact profitability of the company . However, just as Hindalco has taken a longer term view of global demand, perhaps, investors need to.