India Aluminium - Time to pick value:: Standard Chartered Research,

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Time to pick value
 After steep corrections in the past three months Indian aluminium stocks are trading
near their adjusted book values. At the same time, adjusted for cash/capital work in
progress, their RoEs should remain around early-teens given high dependence on
alumina prices.
 We believe that aluminium has strong cost-driven downside support; at the same time,
even if aluminium demand grows at around 4-5%, alumina will still be in short supply.
 We upgrade Hindalco to Outperform from In-Line given its non-cyclical product mix (80-
85% of Novelis production) and rise in alumina sales once Utkal Alumina is
commissioned.
 We upgrade Nalco to Outoperform from Underperform given it is trading near book
value and its earnings are likely to be relatively stable because of the high dependence
on alumina sales.


Indian aluminium stocks, particularly Nalco and Hindalco, have recently corrected sharply,
impacted by lower aluminium prices and high valuations. Though the stocks are near historical
lows, industry fundamentals are better off.
 Aluminium prices have strong downside support at around US$2,300-2,400/tonne because of
rising energy prices.
 The global alumina market is likely to be finely balanced in the next few years. We expect
cost-push and relative scarcity of alumina to push up prices.
We upgrade Hindalco to Outperform from In-Line given its non-cyclical product mix (80-85% of
Novelis production) and rise in alumina sales once Utkal Alumina is commissioned. It is
undertaking the most aggressive expansion plan in its history – likely to result in significant
capacity addition from end-FY12 onwards. Hindalco is trading at 0.8x FY12E book, which we
believe is unjustified given the growth prospects beyond FY12.  
We upgrade Nalco to Outoperform from Underperform given it is trading near book value and its
earnings are likely to be relatively stable because of the high dependence on alumina sales. The
much awaited new alumina capacity is in the process of being commissioned and from FY13
Nalco would likely be able to sell 1-1.2m tonnes of alumina.


There is value
 After the steep correction in Indian aluminium stocks, value has emerged. We upgrade
Hindalco to Outperform from In-Line and Nalco to Outperform from Underperform.
 We raise Nalco’s FY13E EPS by 6.7% to Rs6.5 and also introduce FY14 estimates. A key
catalyst will be the commissioning of the new alumina smelter. We rate Nalco as Outperform
with a price target of Rs73/sh. Nalco is trading near its all-time low on price/book and
EV/EBITDA.


 We raise Hindalco’s FY12/13 EPS estimates by 7.1%/5.3% to Rs18.1 and Rs20.5. We also
introduce FY14 estimates. The stock’s catalysts: commissioning of the new aluminium smelter
at Mahan and clarity on commissioning date for Utkal Alumina. We value Hindalco at a
premium to Nalco (7x FY13E EV/EBITDA compared to 6x for Nalco) given it has strong
growth drivers post FY13 – commissioning of its Aditya smelter and refinery. We estimate that
Hindalco standalone earnings could grow by more than 60% over FY13-15. We upgrade
Hindalco to Outperform with price target of Rs174/sh.


 We believe that the global alumina market will remain finely balanced for years to come.
Driven by cost-push and relative scarcity of alumina, prices are likely to rise in the next 2-3
years.
 Aluminium demand has remained relatively strong in the first seven months of CY11, growth
nearly 8%. Aluminium has big cost-push support from rising energy prices and a relatively
tight alumina market.