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Aluminium prices have surged past US$2800/t for the first time in three years. The price rise has
been supported by high energy prices as well as robust end-use demand. We believe Hindalco
would be a key beneficiary with its high level of resource integration. We have a Buy rating on
Hindalco with TP of Rs315.
About 40% aluminium production costs are related to energy and recent price moves have
been helped by: 1) High energy prices 2) Investor demand 3) Strong end-demand in US and
Europe 4) Uptick in Chinese demand 5) US Dollar weakness.
Hindalco would be a key beneficiary from this move as about 50% of Ebitda is a direct play on
aluminium prices. Our assumptions factor aluminium prices at $2,486/t and at current market
prices of US$2,800t, of aluminium we would see FY12 Ebitda move higher from $2.1bn to
$2.4bn.
Also, there is a peculiarity in the way Novelis reports earnings, the COGS is generally an
average of the last 3 months on sales and hence margins generally tend to look higher in
times of rising prices. We note that Novelis competitors such as Ball, Crown and Anheuser
Busch continue to report robust performance.
However, a major headwind which may not allow for a complete pass through of prices is
increasing energy costs: 1) with CP coke up over 45% yoy 2) Coal India has also raised coal
prices by 30% in February which will impact FY12F earnings.
Rising interest rates have also emerged as a new headwind and would impact project costs.
Hindalco's stock price appears to have been completely oblivious to the aluminium price
moves and have moved in the opposite directions over the last few months driven by
concerns over: 1) No major near-term triggers as now Novelis recovery is fully priced 2)
Concerns over delays in expansion projects.
We have a BUY rating on Hindalco with TP of Rs315.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aluminium prices have surged past US$2800/t for the first time in three years. The price rise has
been supported by high energy prices as well as robust end-use demand. We believe Hindalco
would be a key beneficiary with its high level of resource integration. We have a Buy rating on
Hindalco with TP of Rs315.
About 40% aluminium production costs are related to energy and recent price moves have
been helped by: 1) High energy prices 2) Investor demand 3) Strong end-demand in US and
Europe 4) Uptick in Chinese demand 5) US Dollar weakness.
Hindalco would be a key beneficiary from this move as about 50% of Ebitda is a direct play on
aluminium prices. Our assumptions factor aluminium prices at $2,486/t and at current market
prices of US$2,800t, of aluminium we would see FY12 Ebitda move higher from $2.1bn to
$2.4bn.
Also, there is a peculiarity in the way Novelis reports earnings, the COGS is generally an
average of the last 3 months on sales and hence margins generally tend to look higher in
times of rising prices. We note that Novelis competitors such as Ball, Crown and Anheuser
Busch continue to report robust performance.
However, a major headwind which may not allow for a complete pass through of prices is
increasing energy costs: 1) with CP coke up over 45% yoy 2) Coal India has also raised coal
prices by 30% in February which will impact FY12F earnings.
Rising interest rates have also emerged as a new headwind and would impact project costs.
Hindalco's stock price appears to have been completely oblivious to the aluminium price
moves and have moved in the opposite directions over the last few months driven by
concerns over: 1) No major near-term triggers as now Novelis recovery is fully priced 2)
Concerns over delays in expansion projects.
We have a BUY rating on Hindalco with TP of Rs315.
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