>INDIAN ALUMINIUM SECTOR (UBS)

Compelling story; valuations stretched

■ Aluminium is least preferred metal; Sell Hindalco & Nalco
Aluminium is our least favoured metal; UBS has cut LME aluminium expectations by 6% for 2010 and 9% in 2011. Earnings for Hindalco are now expected down 22%/27% for FY10/11E but for NALCO, the world’s cheapest producer of aluminium, we have brought profits up 22%/30% in FY10/11E as lower input prices raise margins. We downgrade our ratings on both companies to Sell from Neutral on expensive valuation and weakening demand fundamentals for aluminium globally.

■ Indian aluminium a long term story
We believe the fundamentals of the Indian aluminium industry are strong. This is primarily driven by two factors: 1) the cost of production in India; given the availability of bauxite and coal in close proximity, and 2) the demand situation in India should improve dramatically driven by growth in the power, automobile and industrial segments. Standardized IRR’s are 16%, at LME aluminium at $1,750.

■ Key picks
In our coverage universe, we prefer Vedanta Resources, as it offers one of the most compelling growth arguments across diversified resources and has the lowest capex cost/TN & the lowest cash costs/TN. We rate Hindalco and NALCO as Sells given near-term operational issues at Novelis and valuation concerns, respectively.

■ Valuation: Buy rating on VED and Sell ratings on Hindalco & NALCO For Vedanta, we get our price target of £17.6 per share by taking a 0.75x P/NPV on our base case Mar’10E NPV of $32/share. We maintain our SOTP -based price target of Rs 55 for Hindalco and raise our price target from Rs 190 to Rs 250 for NALCO, based on a target FY10E 15.0x EBITDA (trough) multiples.

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