Buy Hindalco:: Capacity expansion to boost earnings… �� Industry leader •ICICI Securities,

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Capacity expansion to boost earnings…
�� Industry leader
• Hindalco is a leading producer of aluminium in India enjoying a
39% market share (excl exports). The company has backward
integration, which makes it one of the lowest cost producers of
aluminium in the world.
• Hindalco has forward integration into value added products like
flat rolled product (FRP) (market share of 53% in 2009) and
aluminium extrusion (with a 20% market share in 2009).
• The company has doubled its aluminium capacity in the last 10
years and it has plans to add ~0.82 million tonnes in coming 5 to
7 years, which will help it to garner higher market share.
• The wholly owned subsidiary Novelis, is the largest producer of
FRP in Europe and South America and the second largest in North
America & Asia. It accounts for ~19% of worlds FRP production.
�� Going ahead
• Demand for aluminium in the last 5 years has registered a robust
CAGR growth of ~10-12%, demand growth has stabilized at ~8-
10% in 2010-11, and going forward consumption of aluminium for
2010-2015 is estimated to grow at a CAGR of ~9%.
• In order to capture the growth opportunity the company has
undertaken various brownfield and greenfield expansion plans,
which will take total aluminium refining capacity to 1.32 million
tonnes per annum (tpa), double the alumina capacity & achieve
self-sufficiency in power.
• The margins are expected to improve going forward, as
improvement in LME prices will lead to better realizations
whereas the cost is expected to remain stable, as all its brownfield
and greenfield projects have complete backward integration.
• Its overseas operations at Novelis is also expected to do well as it
is undertaking a series of steps to streamline and optimise the
manufacturing operations coupled with capcity expansion from 3
million tpa to 4 million tpa in next 5 years.
Valuation
Hindalco’s business will grow notably as expanded capacities (overall)
come on stream. Improved sales mix with higher focus on sale of value
added products will lead to strong revenue growth. Revenue of Novelis is
largely driven from its two segments, viz., cans and auto sector. Demand
from can is repetitive in nature while the automobile sector is expected to
post strong growth. Thus performance of Novelis is expected to be robust
on the back of strong demand, technological edge and cost efficiency.