>Hindalco Industries (CITI)

Sell: Better Copper TC/RCs Can't Offset Aluminium Oversupply

* Maintain Sell — We are cutting our target price to Rs34 on a 34-57% earnings
cut for FY10-11E, following a reduction in our global LME price forecasts. We
roll forward to March10 (from Dec09) and raise our target P/E multiple to 7x
(vs 6x) as we assume near trough price forecasts and incorporate a better
outlook for copper TC/RC margins. At our target price, Hindalco would trade at
an EV/EBITDA of 5.6x given its high leverage vs. international majors at 5x.

* Aluminium surplus — We have cut our average aluminium price by 44% to
US$1,300/t for FY10E and by 50% to US$1,380/t in FY11E. Current prices are
well below average costs with little scope for further cost cuts, which effectively
means that the downside to prices is limited. However we expect continuing
oversupply and little likelihood of prices recovering before 2010.

* Copper TC/RCs improving — Copper TC/RCs have been rising rapidly due to
easing concentrate supply demand balance as smelter production cuts are
being implemented more rapidly than concentrate production cuts. We expect
TC/RC margins to be ~USc19-20/lb in FY10-11E, however, part of the benefit
should be lost due to expected weakness in prices of copper and by-products.

To see full report: Hindalco