>ALUMINIUM SECTOR

■ Depreciating rupee to cushion impact of lower commodity prices
Aluminium prices have tumbled from its highs hit earlier in the year (29% from peak) on worries about the strength of the global economy and thus potential industrial demand, particularly as the European sovereign-debt crisis continues. With LME prices near US$2,000/ton, we see half of the industry in red (average global aluminium cost ~US$2,000/ton) and this would lead to production cuts going ahead. We revise our aluminium prices estimates for FY12 to US$2,310/ton and US$2,250/ton for FY13. The impact of lower commodity prices on profitability of domestic metal producers would be cushioned by the sharp depreciation in the rupee against the dollar (19% YTD). So while producers in other countries have seen 10-15% fall in revenues, domestic producers would see just a 1-3% fall.


■ Hindalco: Novelis to drive earnings
Hindalco has corrected sharply on account of 1) delay in capacity expansion plan 2) rising interest costs 3) high coal costs 4) weak commodity prices. We believe that most of the negatives are priced in. In FY13, some rebound in demand and debottlenecking activities would drive 4-5% volume growth for Novelis. We expect adjusted EBIDTA/ton for Novelis to increase from US$346/ton in FY11 to US$359/ton in FY12 and US$368/ton in FY13. On a consolidated basis, we expect the company to witness an EBIDTA CAGR of 14.7% over FY11-13 led by higher contribution from Novelis. Earnings from Novelis would be resilient enough to withstand any global shocks and thereby provide downside support to the stock price. We recommend a BUY based on our sum-of-the-parts (SOTP) 9-month fair value of Rs185.


■ NALCO: Risk-reward favorable; Upgrade to BUY
NALCO’s stock price has halved over the last six months on account of depressed Q2 FY12 results and weak commodity prices. We believe the company has formed a bottom in terms of profitability in Q2 FY12 and the worst is behind us. We expect margins to improve from Q2 FY12 levels on the back of improved coal supply and higher exports of alumina. We expect OPM to improve drastically from the 9.5% reported in Q2 FY12 to 21.1% in FY13. With no major capex over the next two years, we estimate cash levels to increase from Rs56bn to Rs70bn by end-FY13. Our FY13 cash levels account for 54% of the current market cap and would lend support to the stock price. At the CMP of Rs51, the company is trading at 5.2x FY12 EV/EBIDTA and 4x FY13 EV/EBIDTA which is at a ~50% discount to its historic one year forward average multiple of 10.5x. We do not see much downside from the current levels and upgrade the stock from Market Performer to BUY with a revised 9-month price target of Rs60.


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