Below is the transcript of Ajay Bagga, Parag Thakkar and Vishal Jajoo's interview with Menaka Doshi and Anuj Singhal of CNBC-TV18.
Menaka: Is Hindalco Industries a good buy at this point in time given the kind of decimation we have seen yesterday, the mild recovery that we have seen today?
Parag Thakkar: I don’t look at it from such a short term perspective. My view is that it is a company with Rs 50,000 crore debt. So you have to build in lot many good expectations and last year’s Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) was around Rs 8,000 crores. So it is a very high risk bet.
Menaka: So irrespective of the Supreme Court decision you would have not bet on Hindalco is what you are saying?Thakkar: Yes, at this price at least.Menaka: Okay, and the Supreme Court decision now just vindicates your position to some extent saying look, there is uncertainty as well?Thakkar: That will just take away 12-14 percent of the fair value of Hindalco. So that correction is done. So I would say that that event is more or less priced in but fundamentally my view is a company with Rs 50,000 crore debt and Rs 8,000 crore EBITDA last year, of course EBITDA is going to improve because of that capacity additions and all and then that will get repaid, so EBITDA will look attractive at a later stage but I would not still buy it at this price.Menaka: Would you agree that the loss of its coal supplies is a challenge that has been factored into the price already because we don’t know which way the Supreme Court will go on the 1st. Now the best case scenario is that they don’t de-allocate and they just put in punitive measures like some penalties, but what if they do de-allocate and that means that Hindalco has to rethink its entire coal supply strategy, would you then say that the stock is a sell or would you say that at these prices it continues to be a buy?Bagga: Well I would say at these prices it is a buy. Definitely the correction has come in already and if you cut through the domestic operations of Hindalco which will get impacted by the Supreme Court judgement 25 percent of Hirakud smelter production was dependent on domestic coal. They had three mines allocated post 1994 out of which one already is on the way of de-allocation; the one which was done last and there is an impact on the Hirakud smelter of about 25 percent coal in the worst case scenario which is translating into about Rs 6 in terms of stock price impact.So if you see the correction yesterday it is already baked in. The Mahan and Aditya smelter have really not kicked in in a large way. The capacity has not really started producing and those were factored in in the FY16 and FY17 kind of numbers. So there also if you work backwards you are getting an Rs 8 impact additional.So about Rs 18 goes from what could have been yesterday beginning of the day kind of target price from Hindalco, about Rs 14 goes in a worst case scenario is what we can look at. It is not as bad as it looked probably yesterday when the announcement came. Now that we have had time to look at the numbers more deeply it is hit, but it is not that bad a hit on say, Rs 210-215 target price one year down the line. You are looking at about Rs 14 getting shaved off.
Anuj: What is your best case scenario? If things were to go positive for Hindalco from hereon what kind of price targets would you have on Hindalco?
Bagga: As Parag also mentioned, they have taken on a lot of capex. If you see the last three years capex, just on Mahan and Aditya smelter nearly about Rs 20000 crore has got undertaken already. This year’s capex was forecasted at about Rs 3500 crore more. So, a lot of capacity has been setup which was getting ramped up month-on-month which is now going to flow through to the bottomline.
Overall global macro wise also some amount of support, the margins are good, the coal is a spoiler to that extent. So, I would be positive on the stock overall. In a bullish scenario if there is a recovery in the second half and if Novelis does better than about 8 percent CAGR growth in Novelis is baked in, in over the next two to three years but if you look at the kind of capacity they are adding across the geographies and the higher end products that they are doing for example between aluminium cans and automotives there is nearly a 2.5x EBITDA difference in realisation.
So, if they can ride the global auto recovery, it becomes a very interesting play. So, I would say a better case scenario could take the stock nearer to Rs 240 also on a one year basis. So, looking at the stock if you are owning it, I don’t see a panic reaction to sell. Worst case is baked in. it could get better from here.
Anuj: Do you also have a call on Hindalco because the worst case scenario could be, if Mahan for example, if that is de-allocated then there could be some problems but at current prices what is your call on Hindalco?Jajoo: Most of the people are comparing it in this kind of de-allocation. If at all it happens, so I am not of the camp that complete de-allocation will happen.Menaka: But that is not in anybody’s hand to determine. It is actually what the Supreme Court does, so you have got to look at all case scenarios.Jajoo: Yes, but if you compare it with the telecom licences these were intangible assets, here you have tangible assets, a lot of banks’ money is riding on it. As Mr Parag has mentioned that in just one case a significant portion of Rs 50,000 crore is riding on this particular asset. So there could be a hold out. The banks will come into picture, the investors will come into picture at some point of time at this juncture. So we have seen a host of negative announcements. There were allegations against one of the directors in the past, there were allegations, there was cash found in the company’s office, all those things but ultimately it becomes a thing of the past. If you look at the assets that have been created, if you look at the capacities that have been built up and ultimately compare it then the stock has got a decent upside from the percent levels.Menaka: Arent you worried that you might be missing out on a great opportunity? Mr Ajay says this stock could be well on its way to Rs 240-250.Thakkar: I am a very risk averse person. I will be happy to miss such opportunities because I am not comfortable with the debt level on the balance sheet, that is my problem.
Menaka: But that is a problem that plagues a large number of industrial companies in this country, so why is it that you would single out Hindalco for it, then you would not have a case to invest in a large number of companies?Thakkar: Yes, because ultimately all said it is a cyclical business and a lot of these capacities which are coming on stream might face some kind of execution challenge.Menaka: Are you saying you don’t expect the stock to go to Rs 240, that in fact you expect the stock to decline from here or are you saying you just don’t care to have a view?Thakkar: From this point of view we don’t have a coverage on the stock. So it will not be fair on my part to comment on my target price or anything but this is just a risk aversion. Basically our core theme is that we are more bullish on US and India. US we will play through IT companies and India we will play through banking or say industrial names.Menaka: But this has a huge exposure through Novelis to North America, so why would you ignore that altogether?Thakkar: Yes, Novelis I completely agree and I also expect that the aluminium used for car is going to increase.Menaka: And look at what is going on to the auto industry in the US, it has been a big recovery story.Thakkar: Yes I completely agree on that part but for example if you are playing through IT there is so much of cash on the balance sheet and cash flows are so strong while here you are taking a risk of debt. So that is my way of looking at it.Anuj: Since we are on that topic what about Jindal Steel & Power because while Hindalco has recovered today JSPL is still down quite a bit, how would you push that stock?Bagga: Jindal has the biggest impact out of the entire pack. So I would say right now be cautious on Jindal Steel and Power. They have the biggest impact amongst the entire pack. I would say Hindalco was the second one but that on a closer scrutiny the numbers are looking better.
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