>HINDALCO INDUSTRIES LIMITED (ANTIQUE)

INVESTMENT THESIS

■ Favourable enviornment for standalone operations
Hindalco’s low cost domestic operation is highly leveraged to aluminium prices. Aluminium prices have jumped sharply from its lows (~45%) triggered by strong recovery in China underpinned by tied up inventory at LME. Leadership in downstream products and monopoly in specialty alumina helps it fetch additional premium over its domestic peers. Domestic operations are well funded and equity contribution for ongoing greenfield projects will be met through internal accruals.We expect a 23% CAGR in its domestic operations over 2010-2102e.

■ Novelis drag is behind as pain is priced in
Novelis is expected to turnaround in FY11 on the back of potential cost savings and fading overhang of price ceiling contracts. Improving demand environment, stable metal premium and potential MTM gains from sharp pullback in metal prices will help ease cashflow pressure in the coming quarters. We expect operating margins to return back to 7-8% levels in FY11 (last achieved in FY06) on the back of 7% revenues growth and cost savings yields.

■ High leverage to weigh on growth prospects
Easing credit markets has significantly improved outlook on Hindalco’s balance sheet. Gearing ratios at 1.1x FY11 remains comfortable as fund raising initiatives help ease concerns on short
term liquidity and growth prospects. Though we remain optimistic on its brownfield expansion projects however its ambitious Greenfield projects are likely to face delays on account of regulatory delays and timely financial closures.

■ Valuation
Cost competitiveness and high leverage to metal prices makes Hindalco an attractive proposition in the current environment. Novelis carry’s short term risk in terms of earnings and cashflow offers a favorable earnings proposition in FY11. We initiative coverage on this stock with SOTP price of INR127 per share. we recommend a BUY with potential upside of 21% from current levels.

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