Hold Hindalco; target of Rs 193: Sushil Finance

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Hold Hindalco; target of Rs 193: Sushil Finance

Sushil Finance has recommended hold rating on Hindalco with a target of Rs 193, in its June 24, 2011 research report.

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Sushil Finance has recommended hold rating on Hindalco with a target of Rs 193, in its June 24, 2011 research report.

"Hindalco one of the largest aluminum producing company, is likely to post encouraging numbers going ahead on the back of huge expansion plans. The company's Indian operations fetch in far higher margins than its overseas operations. Thus additional capacity in India, would result in higher profitability margins on a consolidated basis. Hindalco, the industry leader in aluminum is on an expansion spree to capture further market share. The company has huge expansion plans, doubling its domestic aluminum smelting capacity to 1.29MTPA (current 5LTPA), and tripling its domestic refining capacity to 4.5MTPA (current 1.5MTPA). This expansion is likely to be completed by FY15 in a phased manner at a cost of ~Rs.43,580Crs. By FY12 the company is likely to see a smelting capacity of 917,000 TPA. It is also expanding its global operations by increasing Novelis capacity from the current 3MTPA to 4MTPA. This is likely to be commissioned in a phased manner by FY16 at a cost of $1.5bn. The company is thus likely to post robust numbers going ahead on the back of strong volume growth."

"According to the general observation, economies witness a strong metal consumption growth pattern once the GDP per capita on a PPP basis reaches a level of ~$3000. This trend was observed with China, Japan, Taiwan and Korea. After China's GDP per capita PPP reached $3195 in 2004, its aluminum consumption grew at a very rapid pace for the first 4-5 years. We therefore believe that India will not be an exception to this thumb rule, and is likely to witness stupendous growth in metal consumption as it has just crossed $3000 mark in 2010 according to IMF estimates."

"Novelis which has its presence in the four most strategically placed locations like North and South America, Europe and Asia, has posted good set of numbers for the fourth quarter of FY11. The company has witnessed rise in the volumes, the Shipments of flat-rolled aluminum products increased by 7% on a YoY basis to 771 KT. For the full year its shipments have increased by 8.5% YoY to 3097,000 tonnes. The Sales and EBITDA are up by 21% & 22% YoY to $3bn and $280mn respectively. Its EBITDA/tonne has also stabilized at above $300 levels. We therefore believe that with the expansion, restructuring and debottlenecking activities taken up by Novelis, it is likely to post encouraging numbers going ahead."

"Secondly India being a developing country having aggressive infrastructure & power plans, is likely to have higher demand. It will thus have a margin of safety- "a protective shield" from its Indian operations in next metal down cycle. Its standalone revenue and PAT is likely to grow at a CAGR of 12.2% and 14.6% respectively for the next two years, while consolidated is likely to grow at 6% and 20% respectively. Considering the growth potential we have a positive stance on the company and recommend "HOLD" with a target price of Rs 193. We have valued the domestic business at 7x FY13E earnings, and Novelis at 6x FY13E EV/EBITDA," says Sushil Finance research report.

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