Technical & Macro Analysis Of Indian & Global Market----: Hindalco: Another Example Of Buying A Good Business & Excellent Management In "Distress/Unusual Conditions" ?

For Hindalco 72-68 might be a very good zone for accumulation despite continuing metal woes & worst expected Q2FY16 result

CMP: 72

Buy: 72-68;

TGT: 85-120 (1-6M)

TGT: 175-250 (12-24M)

TSL<65
Note: Consecutive closing below 65 for any unforeseen reason, Hindalco may fall up to 55, where it can be accumulated again for better buying average (investment).

Rationale:

The stock already corrected by nearly 65% for the last one year for various reasons starting from coal block allocation issues & subsequent case against its chairman (KMB).
The financial performance of the company is also hurt by a year long slump in commodities price (specially aluminum & copper) coupled with rising expenses associated with coal block auctions and higher finance costs.
The company has also big capex plan for its various smelters in India to achieve operational synergy and full capacity utilization and for that the management already guided significantly lower bottom line or even loss in the result of Q2FY16 due to interest expenses and depreciation cost.
After its coal blocks were de-allocated from FY-16 on wards following Sep'14 SC order, the company aggressively bid in subsequent coal auctions to win four coal blocks and it was also forced to get coals from other sources, which ultimately pushed up its power & fuel costs by around 45% in Q1FY16.

Looking ahead:

Once the coal blocks it owns become operational by FY-16, the cost may come down significantly.
As par reports, there is a provision in the new mining & mineral bill which effectively has paved the way for mining to continue till 2030 despite so much controversies there as the affected companies has invested in those mines heavily.
Thus various cases related to mining will continue to go on along with usual business.
We are very near to bottoming out process in global commodities and China slow down. China is gearing up massive investment plan to combat this commodities woes and demand creation in both onshore and offshore. ECB is ready for more QE along with BOJ.
Fed will be in no hurry for "Hawkish Hike" in the near future. We may see maximum 0.25-0.50% rate hike by March'2016 by Fed to counter its lack of confidence stance with US real economy growth and global growth concern (with lots of caveats also as USD is already strong and inflation is not picking up despite good headline unemployment numbers amid no wage inflation at all).
There is even talk of QE4 in some different form targeting the real street in US by keeping the wall street stable in 2016 election year.
All these will ensure "no dearth of global liquidity" which is the primary requirement to stay afloat. Structural reform is not so easy and will follow in a gradual manner.
Lately, there are growing trend in capacity reductions in copper mines due to non-viable end price realisations (below production costs). Glencore, the world's largest copper miner recently shut down one of its copper mine amid speculation of its credit default.
Thus we may see significant supply reductions in global commodities market in the days ahead and coupled with the stable demand (even at current level) will ensure proper demand-supply dynamics and better price realizations.
Recently, Hindalco also sold its Australian copper mine due to this pricing pressure which may be also beneficial for its stretched balance sheet (consolidated total debt as on March'15 is around Rs.67000 cr !!).
We may see more such de-leveraging effort by Hindalco in the days ahead and the company is also planning to raise necessary capex (Rs.6000 cr) through NCD and preferential issuing of shares in FY16 to repay some of its existing loans, refinancing and to finance some of its domestic capital expenditure.
The company is also focusing on value added products to boost its realizations and is setting up billet and can production facillity near its plant.

Other than China slowdown & global growth concern and metal woes, the primary issue is here the coal scam accusation by CBI against the company chairman along with our former PM (Manmohan Singh-MMS). As par recent report, CBI has recommend PE (preliminary enquery) against the co in its report to SC.

Refuting the allegation, the company strongly stated that "it made its case for coal mining allocation in a transparent & lawful manner".

Having said that, there is a high probability that ultimately SC may provide relief to both the so called accused (KMB & MMS) against the summoning order by the trail court as its very tough to prove specific vicarious personal liabilities in such cases. Presently the SC has stayed the summoning order until the whole issue will be heard and decided.

Considering all the above bad news for Hindalco and its stock price action, its may be another case of " buying a good business in distress or in some unusual conditions having excellent & well respected management".

As par BG metrics: (As par current market parameters)

Current median valuation of Hindalco may be around: 75

Projected fair valuations might be around: 105-145-175 (FY:16-18)