Sanju Verma, Group CEO of Violet Arch Capital told CNBC-TV18, "Chinese demand is not gung ho and it will take a while before that materially translates into better aluminium prices on the LME. Aluminium prices have actually fallen even further to USD 1745, but for September quarter it was already at a four-year low of USD 1780 which was 7 percent lower than last years USD 1910. So that clearly tells that there has been a secular decline and it doesn’t look like it is going to stop in a rush."
She further added, "I am positive on metals because I believe that one cannot just look at Hindalco Industries' standalone numbers. It is true that these standalone numbers in Indian operations will continue to disappoint for a while. The reason why we are bullish on Hindalco Industries is the fact that people simply seems to have forgotten that Novelis is a large part of their business. Novelis results were excellent despite aluminium prices being soft, Novelis threw up free cash to the tune of USD 178 million and EBITDA to the tune of USD 228 million. Novelis, after many quarters, has turned free cash flow positive and I think that dwarfs a lot of other negatives with respect to Hindalco standalone domestic operations."
"Going forward the international operations will continue to throw positive surprises because the North American markets is a large part of the global demand for Novelis. While the North American markets continue to be sluggish, Novelis has really ratcheted up its act in South America. It is expanding automotive finishing capacities globally, its share of value added businesses is increasing. So I won't be surprised if, over the next three-four quarters the company doing an EBITDA per tonne of something like USD 350-360/tonne which is what they did a year back," Verma said.
She further said, "Jindal Steel & Power (JSPL) is a slightly riskier bet because the government, a couple of weeks back, deallocated 11 coal blocks and some of those obviously belongs to JSPL. I am positive on this company because despite the fact that it has a net debt to EBITDA of 1.1 times, which is a reason to be alarmed, but that is not a reason to panic. More so, here is a company which, every quarter throws up free cash profits of something like Rs 1000 crore and I would give them a lot of marks for their strategy which is on the right track."
"It was a brilliant move on their part to acquire 52 percent in Gujarat NRE Coke with 650 million tonne of coal reserves. Gujarat NRE Coke just produces 1.5 million tonne and JSPL said over the next three-four years that they will ramp up production to 5-6 million tonne. If they are able to do that I think that will be a big swing trigger on the upsid," Verma added.
She said, "I believe that while the FY14 profit numbers for JSPL will be pretty much pedestrian in the region of Rs 3200-3300 crore which is flattish over FY13, FY15 will be a game changer. I wouldn’t be surprised if on the positive side they do something like Rs 4400-4500 crore and on the conservative side they do something like Rs 3800 crore which means they could easily do 34 percent in terms of profitability growth over FY14. Conservatively speaking they will atleast do 18-19 percent."
"The earnings trajectory is also intact and I wouldn’t really read too much into the fact that their Chhattisgarh coal blocks are under the scanner because that in any case does not account for more than Rs 15-16 per share. This is a risky bet because last year this stock was at Rs 474. In August this year it had fallen all the way to its 52-week low of Rs 182 and today it is at Rs 259. So it is down 40 percent plus from its high and up 40 percent plus from its recent lows so that is the kind of volatility investors will have to base for. But if someone has the appetite and if one has the sum up for a bit of risk, then this should be a must have in the portfolio if one is bullish on metals overall as a space," Verma said.
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