Metals -1st April 2011

Hindalco is the largest aluminum producer in India, with captive bauxite mines sourcing ~67% requirement for its 1.5mtpa alumina refinery. Along with a 0.54mtpa smelting capacity, it is also the largest maker of flat rolled aluminium products in India. Its copper smelting capacity of 500ktpa is the largest in Asia.

Recent Developments:

• Hindalco’s 3QFY11 net sales increased 2% QoQ to Rs59.7b (up 9% YoY) due to strong LME prices. Standalone adjusted PAT increased 1% QoQ to Rs4.6b; below our estimate of Rs5.7b due to cost escalations of Rs1b on account of disruption of production at its Hirakud and Dahej smelters.

• Novelis reported adjusted EBITDA of US$290m against our est. of US$250m (up 47% YoY and up 10% QoQ). Total shipments increased 6% YoY to 767,000 tons but declined 2% QoQ due to a 12-day strike at its Korean plant. EBITDA per ton increased for the sixth consecutive quarter to US$378/ ton due to continued strong demand, product portfolio optimization and tight control over costs. Novelis plans to increase capacity by 20% over FY11-14 through de-bottlenecking and 220ktpa capacity in Brazil.

Novelis pricing environment favorable; raising LME estimates; upgrading earnings

• The pricing environment for Novelis remains positive due to tight supply side conditions globally. We are upgrading our FY11 EBITDA estimates for Novelis from US$910m to US$1.1b due to strong quarterly performance and continued positive traction. We have also incorporated higher LME prices (US$2,200/t; raised by 10%) to model stronger base metal prices driven by a second round of quantitative easing. Consequently we are upgrading consolidated FY11 EPS by 23% to Rs18.5 and FY12 EPS by 10% to Rs19.5.

Valuation and view:

• We are raising our target price from Rs230 to Rs260 based on 7x FY12E EV/EBITDA. We have toned down our target EV/EBITDA multiple from 7.5x to 7x due to an upgrade in LME assumptions and the best ever performance of Novelis. We Maintain Buy.

CMP (Rs.) 214
MBP (Rs.) 220
Face Value 1
Equity Shares (Mn) 1,914
52-Week Range (H/L) 252 /129
M.Cap. (Rs b) 424.0