Legacy firms Hindalco, Vedanta, Coal India and L&T: Perfect balm for a choppy market

Mind-boggling valuations. Much-awaited listings. Stocks getting pummelled. Ask anyone tracking the Indian stock markets and they will say that this has been the usual story for the new-age companies that got listed for the past year or so. While the listing gave the start-ups’ existing investors a chance to sell their holdings at astonishingly high returns, the stock price crash thereafter left retail investors frustrated.   

In the midst of this, old-economy or legacy companies provided the perfect salve. While they have been around for years, the recent surge in investor interest was on the back of factors such as commodity prices increasing, the uncertainty on geopolitical issues or because these companies made some very smart moves. The revenue growth of these companies has been steady, and profitability often on expected lines. And in these uncertain times, their predictable story found favour with investors. Those leading this surge include names such as L&T, Hindalco Industries, Vedanta and Coal India, and most have improved their ranks on the BT500 list this year. The Rs 7.5 lakh crore in public investment announced in this year’s Budget, coupled with emerging opportunities like allowing the private sector in defence or companies spending more on engineering and construction are the other big positives for these companies. No wonder that they are back on investors’ radars.   

What did these old-economy companies do right? As fears of a recession loom large over most big economies globally, businesses have been under pressure to reorient their models. Take the case of metals and mining major, Vedanta, No. 42 on the BT500 list. According to CFO Ajay Goel, its continued focus on disciplined allocation of capital, effective strategic business planning, driving key capex/growth projects and ESG (environmental, social and governance) commitment has helped it create value for stakeholders. “Our return on capital employed has significantly improved from 11 per cent in FY20 to 30 per cent in FY22, while free cash flow increased threefold. We were also the highest dividend-paying company last fiscal in India,” he says. All this has been helped by its record production volumes for aluminium and zinc across all markets. “We also ramped up production in the oil and gas business.”    

In the case of Hindalco, its Managing Director, Satish Pai, says the strategy of vertical integration coupled with operational efficiency and cost optimisation has made the difference. “Our overseas subsidiary Novelis’ focus on organic growth, enriched product mix and operational excellence, has also worked well. Besides, our focus on deleveraging and creating a more sustainable business model has helped strengthen our balance sheet,” he explains. In the process, the company’s return on capital employed has improved significantly from 8.8 per cent in FY20 to 16.61 per cent last fiscal. “Our consolidated net debt to EBITDA was at 3.52x post the Aleris acquisition (completed in April 2020 for $2.8 billion) is currently at a strong 1.47x (as on 30 September 2022). This gives us enough headroom to fuel the next phase of organic growth.”  

What has also helped is the spurt in commodity prices globally. According to Rakesh Arora, Managing Partner of investor relations firm Go India Advisors, both Vedanta and Hindalco—another metals major—utilised this phase to reduce debt. “Since Vedanta has a highly indebted promoter, it has also maximised dividends. None of the companies has announced very large capex and are, therefore, being conservative with their balance sheet. Clearly, the market has rewarded this improvement in balance sheet,” says Arora.     

Vipul Prasad, Founder & CEO of Magadh Capital Advisors, explains Hindalco (No. 49 on the BT500 list) has done well to reduce earnings volatility by expanding its footprint in the fast-growing downstream businesses and widen its geographical mix. “Vedanta has continued to lighten the balance sheet, capture large portions of the material value chain, and diversify its product mix. More focus on a reduction in carbon footprint, more cost structure improvement and scaling up are other factors that can aid valuation multiples for the two stocks,” he says.    

Another company that has done well is public sector major Coal India, which is at No. 44 on the BT500 list. Here, a key priority has been to increase productivity through cost-cutting. From FY14 to FY22, says Aditya Welekar, Senior Research Analyst at Axis Securities, Coal India has been curtailing its workforce at a CAGR of 4 per cent. “Between FY19 and FY22, it has achieved a 13 per cent reduction in its employee base, which now stands at 254,000 employees,” he says.     

But that is just one reason why Coal India has done well. Welekar points to the closure of underground mines as one more area, where at the end of the last fiscal, it accounted for 38 per cent of the workforce but contributed only four per cent of total production. “The reform in the e-auction process has also helped with a merger of five of them into a single window. This has led to higher participation from the non-regulated sectors… and clubbing them [e-auctions] means a uniform market-discovered price for the same grade of coal,” he says. The Russia-Ukraine conflict also saw higher natural gas prices and “drove a shift towards coal-fired power generation in Europe, leading to higher demand for coal and prices as well.” Prasad adds that it is now being increasingly accepted that coal will remain the mainstay for India’s power requirement for another 25-30 years. “With its utility-like characteristics, strong cash flows, robust volume-led topline growth and a solid balance sheet, Coal India looks attractive.”    

Then there is the infrastructure story, with L&T (No. 20 on the list) expected to gain substantially. “It has tried to become asset-light, and the approach is to not use the balance sheet for asset ownership. Now, we see the defence theme picking up and that will add a lot of tailwinds to L&T. Some of the best years of L&T might be just ahead of us,” says Go India’s Arora. Besides, L&T has a dependence on capex in oil and gas and hydrocarbons for the growth of its order book. “Currently, high energy prices have brought back interest in carbon energy sources and capex is picking up. This augurs well for L&T."

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