Buy Hindalco Industries - Fairwealth Institutional Research

Hindalco Industries Limited (Hindalco), the metals flagship company of the Aditya Birla Group is the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Its copper smelter is the world's largest custom smelter at a single location. Company acquired Novelis in 2007 and has marked its footprints in 12 countries outside India with its low cost alumina products.The company is in expansion mode and plans to increase its alumina capacity five-fold to 5.0 mtpa (from 1.5 mtpa currently) and aluminium capacity to 1.7 mtpa, in the next five years.

Investment Thesis:

- Hindalco's brown field expansion plans are right on course and are expected to be completed on time. Brazil unit should be completed by 2012 end, while North America and South Korea units are expected to be completed by late 2013. Hindalco has set target to expand aluminium facilties approximately five times in coming 5-6 years.

- The management has aimed at 80% recycling in its products by 2020. The Korean recycling plant has started to operate while other projects in US, Brazil and China are running as per schedule. Large capex involved in these facilities has started generating revenue and most of them will start functioning by next year. Recently, company has added another recycling facility to be commissioned in Germany, in 2015.

- In a fast developing country like India, the demand for Aluminium is ever increasing. Hindalco is the biggest player in Aluminium industry in India and its cost of production is still the lowest in the industry. In spite of the recent hiccups, company will be able to maintain its growth momentum riding on high volumes and low cost of production. EBITDA will improve in Novelis led by completion of brownfield expansion plans, improved product mix and increased usage of scrap aluminium.

- Q2FY13 results: The standalone second quarter results were in line with expectations with revenues mounting to Rs 6163 cr. Weak rupee helped in maintaining top-line intact. PAT fell 28% yoy to Rs 359 cr from Rs 503 cr an year back. Cost pressure impacted aluminium business margins while copper business grew as cathode prices were up this quarter. Novelis continued to outperform and reported USD 277 million of EBITDA.

Valuation: Large capex incurred in projects have started bearing results and high demand for Aluminium in India and abroad underscores robust revenue visibility for Hindalco and Novelis. The management expects improvement in demand in third quarter of this fiscal with more focus on Chinese operations. Improvement in performance of Novelis should be continued in coming quarters as well and EBITDA should cross USD 1 billion in this fiscal year.

Hindalco has corrected a lot lately and is currently trading at Rs 112 that is 11.2x TTM EPS. We recommend 'BUY' for this stock with a target price of Rs 155.

Source : Equity Bulls

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