Aluminium Sector - Myirisbreport.myiris.com/IDBICAP1/NATALUCO_20110915.pdf · We expect China to...

1

Aluminium SectorCost push to keep prices firm

September 2011

Analyst: Kunal Motishaw +91-22-4322 1166; 077383 [email protected]

2

Executive Summary 3

Industry Section 6

Aluminium Price Outlook 28

Company SectionHindalco Industries Ltd.: Capacity expansion delayed but in sight 30

NALCO Ltd.: Higher Coal costs to hit profitability 49

3

Executive Summary Pricing to be firm – In our view, global aluminium prices will be firm

going forward on the back of increasing costs, (mainly power andfuel) across the world, acting as a cushion on the downside. China,the largest producer of aluminium in the world (39% in CY10),produces ~85% of its power requirement from coal, prices of whichhave increased significantly. Recent unrest in the Middle East couldalso disturb production in these countries (~3.2mn tonnes output inCY11E).

Prior to 2004, supply-demand situation largely determined prices.However, post 2004, there is a higher co-relation seen betweensmelter costs and aluminium prices.

Hardening alumina prices are also affecting non-integrated players,pushing up end prices. We expect aluminium prices to average atUS$2,300/tonne in FY12E and FY13E.

Steam coal prices show no sign of cooling off (CNY/Tonne)

Worldwide Aluminium Demand - Supply

(000 Tonnes) CY08 CY09 CY10 CY11E CY12E

Production 39,518 36,728 40,967 46,865 49,762

Consumption 37,511 35,518 40,362 43,837 47,492

Surplus/(Deficit) 2,007 1,210 605 3,028 2,270

Average LME Prices (US$/tonne) 2,571 1,667 2,173 2,300* 2,300*

* FY12E and FY13E respectively

Aluminium cost curve – ~25% of global production in the red

0

200

400

600

800

1,000

1,200

Jan

-04

May

-04

Sep

-04

Jan

-05

May

-05

Sep

-05

Jan

-06

Ap

r-0

6A

ug-

06

Dec

-06

Ap

r-0

7A

ug-

07

Dec

-07

Mar

-08

Jul-

08

No

v-0

8M

ar-0

9Ju

l-0

9N

ov-

09

Mar

-10

Jun

-10

Oct

-10

Feb

-11

Jun

-11

Source: Bloomberg, IDBI Capital Research

Source: Metal Bulletin , Industry, IDBI Capital Research

Source: Alcoa, IDBI Capital Research

4

Executive Summary (cont’d) Consumption in recovery mode: We expect global aluminium

consumption to increase by 8.6% in CY11 to 43.8mn tonnes and8.3% in CY12 to 47.5mn tonnes respectively, largely led bycontinued growth in China and recovery in the western world.

Production to follow suit: We expect global production to increaseby 14.4% to 46.8mn tonnes in CY11 and 6.2% to 49.7mn tonnes inCY12 backed by China and other Asian countries.

Inventory unlikely to fall: Fall in demand in 2008 and 2009 led to anarbitrage opportunity when contago (Traders sold futures andbought spot) was higher than cost of funds + storage costs. As perindustry estimates ~75% of the inventory on the LME (~10% of CY11production) is locked up in such financing deals. Further,warehouses are incentivizing stocks to remain locked by offeringdiscounts in storage costs. Hence, in our view, not much of thisinventory will be available for sale in the spot market.

LME Inventory build up – No letting up

World Aluminium Consumption – 5.2% CAGR growth (2002-2010)

World Aluminium Production – 6.1% CAGR growth (2002-2010)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

Jul-

98

Jul-

99

Jul-

00

Jul-

01

Jul-

02

Jul-

03

Jul-

04

Au

g-0

5

Au

g-0

6

Au

g-0

7

Au

g-0

8

Au

g-0

9

Au

g-1

0

Au

g-1

1

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

20,000

30,000

40,000

50,000

60,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

Source: Metal Bulletin, Industry, IAI, IDBI Capital Research

Source: IAI, Industry, IDBI Capital ResearchSource: Bloomberg, IDBI Capital Research

5

Executive Summary 3

Industry Section 6




6

Consumption Global Aluminium consumption increased by 13.6% in 2010 on the back of a 5.3% decline in 2009 and a CAGR

growth of 5.9% from 2001 - 2010. Growth over the decade was fueled by China which saw a CAGR growth of18.5% over the same period. Going forward, we expect world aluminium demand to grow by 8.6% in 2011 and8.3% in 2012 partially aided by recovery in developed nations. China, the largest consumer of Aluminium in theworld will continue to dominate albeit at a slower pace.

('000 tons) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

China 4,212 5,202 6,086 7,091 8,580 11,497 12,560 13,879 16,543 18,813 21,152

Growth (%) 17.0 23.5 17.0 16.5 21.0 34.0 9.2 10.5 19.2 13.7 12.4

North America & Canada 6,597 6,797 7,500 7,567 7,653 7,526 6,049 4,705 5,081 5,288 5,529

Growth (%) 6.6 3.0 10.3 0.9 1.1 (1.7) (19.6) (22.2) 8.0 4.1 4.6

West Europe 6,039 6,320 6,603 6,717 7,055 7,244 6,682 5,559 6,075 6,218 6,476

Growth (%) 4.5 4.7 4.5 1.7 5.0 2.7 (7.8) (16.8) 9.3 2.4 4.1

Asia excl China 5,532 6,011 6,646 6,780 6,960 7,108 7,461 7,041 7,843 8,391 8,894

Growth (%) 4.3 8.7 10.6 2.0 2.7 2.1 5.0 (5.6) 11.4 7.0 6.0

Latin America 1,002 1,062 1,219 1,276 1,395 1,468 1,681 1,576 1,867 2,011 2,157

Growth (%) 2.7 6.0 14.8 4.7 9.3 5.2 14.5 (6.2) 18.5 7.7 7.3

CIS + Eastern Europe 1,548 1,583 1,615 1,747 1,919 1,898 1,966 1,605 1,726 1,867 1,989

Growth (%) 5.6 2.3 2.0 8.2 9.8 (1.1) 3.6 (18.4) 7.5 8.2 6.5

Africa & Oceania 721 767 803 831 783 821 1,112 1,153 1,227 1,249 1,295

Growth (%) (1.1) 6.4 4.7 3.5 (5.8) 4.9 35.4 3.7 6.4 1.8 3.7

World 25,651 27,742 30,472 32,009 34,345 37,562 37,511 35,518 40,362 43,837 47,492

Growth (%) 6.7 8.2 9.8 5.0 7.3 9.4 (0.1) (5.3) 13.6 8.6 8.3

Source: Metal Bulletin, IAI, IDBI Capital Research

7

China as a % of world demand – 16% in 2002 to 45% in 2012E

China Aluminium demand and GDP- Positive co-relation seen

China Aluminium usage break up CY10

China – Domination to continue We expect China to continue dominating the global

aluminium scenario with a 13.7% growth in consumptionin CY11 and a 12.4% growth in CY12 to 18.8mn tonnesand 21.1mn tonnes respectively.

China is expected to account for ~45% of total globalaluminium consumption in CY12 from 16.4% in CY02.

Although the Chinese authorities have expressed someconcern on their over heating economy, in our view, itwould be a controlled slow down and don’t see a majorimpact on aluminium consumption. Chinese growthseems to be steadily decelerating towards a moresustainable level. Source: IMF, Bloomberg, IDBI Capital Research

Source: Metal Bulletin, Bloomberg, IDBI Capital Research Source: Industry, IDBI Capital Research

0%

10%

20%

30%

40%

50%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

0%

10%

20%

30%

40%

CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10

GDP Growth ALI Demand Growth

Automobiles29%

Construction32%

Consumer durables

9%

Machinery and

equipment11%

Packaging8%

Electrical10%

Others2%

8

China – Domination to continue (cont’d) China’s bank credit saw a 21% YoY jump during CY10.

While this has slowed to ~16% for the first sevenmonths of CY11, this high growth has enabledsustained high spending on infrastructure projectsalong with increased consumer spending in terms ofhigher house and auto sales.

Although lending has slowed from peak levels,growth in many sectors remains high especially in thereal estate sector where investments grew by ~35%YoY.

High bank credit growth is also reflected in thePurchase Managers Data (PMI), which has showedsustained performance post the fall in end 2008.

China Loan disbursals(Rmb bn) – 19% CAGR growth over 18 years

Chinese Manufacturing PMI

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Dec

-95

Dec

-96

Dec

-97

No

v-9

8

No

v-9

9

No

v-0

0

Oct

-01

Oct

-02

Oct

-03

Oct

-04

Sep

-05

Sep

-06

Sep

-07

Au

g-0

8

Au

g-0

9

Au

g-1

0

Jul-

11


35

40

45

50

55

60

Jan

-05

Jun

-05

Oct

-05

Feb

-06

Jun

-06

Oct

-06

Feb

-07

Jun

-07

Oct

-07

Feb

-08

Jun

-08

Oct

-08

Feb

-09

Jul-

09

No

v-0

9

Mar

-10

Jul-

10

No

v-1

0

Mar

-11

Jul-

11


9

Investment in Fixed Assets (Rmb bn) – 27% CAGR over 8 years

China Auto Production: In sustainable high trajectory

China – Domination to continue (cont’d) Investment in fixed assets upto July 2011 was up 35%

YoY, on the back of 24% YoY growth in CY10. Thisaugurs well for the machinery and equipment,construction and the electrical segments whichcumulatively account for ~53% of the total aluminiumend user industry in China. However, it must be notedthat higher growth witnessed in earlier years (~37%average from CY05 to CY09) has slowed largely tocontain the overheating economy.

The automobile industry which accounts for 29% ofthe total aluminium consumption showed a 32.5%YoY growth in volumes for CY10.

However, growth upto July 2011 was a dismal 2.6%YoY. It may have been a YoY effect as the subsidy fortrading in old, polluting vehicles for newer ones,which was previously due to expire on May 31st 2010was extended upto end-2010. This subsidy wasintroduced in January 2009 as part of a number ofincentives designed to boost auto output and sales.

0

4,000

8,000

12,000

16,000

CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10



0

500,000

1,000,000

1,500,000

2,000,000

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

10

North America and Canada as a % of world demand

North America and Canada in recovery mode

US Aluminium end users

North America – Showing signs of stability North America was the worst hit on account of the

global meltdown with aluminium demand falling by~22% YoY in CY09 on the back of a ~20% fall in CY08.However, with economic recovery, demand increasedby 8% in CY10. Going forward, we expect demand togrow by 4.1% in CY11 and 4.6% in CY12.

The regions share in total consumption has beenfalling consistently and reached 12.6% in 2010. Goingforward, we expect this to further fall to 11.6% byCY12

Source: IAI, IMF, Bloomberg, IDBI Capital Research

0%

5%

10%

15%

20%

25%

30%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

(30)%

(20)%

(10)%

0%

10%

20%



Transportation39%

Packaging25%

Construction9%

Power9%

Machinery8%

Consumer durable

7%

Others3%

Source: IAI, IMF, Bloomberg, IDBI Capital Research

Source: Industry, IDBI Capital research

11

USA Manufacturing PMI

Motor Vehicle assemblies (mm units)

North America – Recovering smartly US saw the worst ever contraction in PMI since 1982

and reached a bottom of 32.9 in December 2009. Justas it was the first of the world’s major economies toslide into recession, it has been one of the first tofully emerge from it. Further, what is encouraging isthe fact that the recovery is being led bymanufacturing sector, however problems in theconstruction space persist. Part of the recent strengthof US manufacturing can be attributed to the boostfrom re-stocking. We expect aluminium demand togrow by 4.1% in 2011 and 4.6% in 2012.

Transportation accounts for 39% of total aluminiumusage in US, which saw a sharp decline in 2008 and2009 mainly from the automotive sector. GM andChrysler filing for bankruptcy triggered the downfallin automotive numbers. However, depletedinventories and fleet sales allowed automotiveproducers to increase production in CY10 to 92.89mnunits up 35% YoY. Growth for 1HCY11 was up 8.3%YoY. The encouraging part is that production hasremained above 7mn tonnes for over 22 months now.



20

30

40

50

60

70

80

Jan

-80

Jan

-81

Jan

-82

Jan

-83

Jan

-84

Dec

-84

Dec

-85

Dec

-86

Dec

-87

Dec

-88

No

v-8

9N

ov-

90

No

v-9

1N

ov-

92

No

v-9

3O

ct-9

4O

ct-9

5O

ct-9

6O

ct-9

7O

ct-9

8Se

p-9

9Se

p-0

0Se

p-0

1Se

p-0

2Se

p-0

3A

ug-

04

Au

g-0

5A

ug-

06

Au

g-0

7A

ug-

08

Jul-

09

Jul-

10

Jul-

11

0

3

6

9

12

15

Feb

-98

Oct

-98

Jun

-99

Feb

-00

Oct

-00

Jun

-01

Feb

-02

Oct

-02

Jun

-03

Feb

-04

Oct

-04

Jun

-05

Feb

-06

Oct

-06

Jun

-07

Feb

-08

Oct

-08

Jun

-09

Feb

-10

Oct

-10

Jun

-11

12

Machinery and Construction Index

US Housing starts (000 units)

North America – Recovering smartly (cont’d) The construction and machinery segment which

account for ~17% of aluminium consumption, hasrebounded strongly from the lows hit during thefinancial crisis. Although the residential constructionsector is showing some signs of improvement, thebest that can be said of the non-residential sector isthat it is starting to stabilise, but with downward bias.

The end of the homebuyer tax credit in April 2010has had a dramatic impact on residential constructionactivity. Weak sales continue to discourage UShomebuilders.

However, housing starts were up 6% YoY in CY10, thefirst year since 2005 in which the residentialconstruction sector making a positive contribution tothe US economy.

0

100

200

300

400

500

600

Dec

-98

Jul-

99

Jan

-00

Jul-

00

Jan

-01

Jul-

01

Jan

-02

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11



0

500

1,000

1,500

2,000

2,500

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

13

EU as a % of World demand

EU showing encouraging signs

EU Aluminium end users

EU – Recovering modestly despite internal problems The European Union (West Europe) saw demand falling

by 16.8% in CY09, on the back of a 7.8% fall in CY08, thebiggest fall after North America. However with expansionin the manufacturing sector, aluminium sector witnesseda rebound and demand grew by 9.3% YoY in CY10. Goingforward, we expect a modest growth of 2.4% in CY11 and4.1% in CY12 on the back of renewed financial problemsresulting in overall real economy being relatively muted.However, export of high end cars to Asia from Germanycould spring up a positive surprise.

EU’s share in world aluminium consumption is expectedto decline from 15.7% in 2009 to 13.6% in 2012.

Source: Industry, IAI, IDBI Capital Research

Source: IMF, IAI, IDBI Capital Research

Source: Industry, IAI, IDBI Capital Research

10%

12%

14%

16%

18%

20%

22%

24%

26%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

(20)%

(15)%

(10)%

(5)%

0%

5%

10%



Automobiles40%

Construction24%

Packaging15%

Machinery and

Equipment14%

Others7%

14

EU 27 PMI – Struggling to keep its head above the water

Euro Monthly construction Index – Dismal show

EU – Slow recovery As can be seen from the PMI data alongside, recovery

has been slow as compared to other regions. Aftertouching a low of 33.5 in February 2009, it reachedover 50 only in October 2009. In our view, CY10aluminium demand could be largely aided only bysome inventory restocking.

The construction sector which accounts for ~24% ofthe total aluminium consumption in EU has seendismal growth over the past few months. This wasmainly due to output growing only in 5 of the 27countries. Going forward, civil engineering and publicsector construction spending will be obvious targetsfor government cuts thus putting more pressure onthis sector.



30

35

40

45

50

55

60

65

Mar

-06

Jul-

06

No

v-0

6

Mar

-07

Jul-

07

No

v-0

7

Mar

-08

Jul-

08

No

v-0

8

Mar

-09

Jul-

09

No

v-0

9

Mar

-10

Jul-

10

No

v-1

0

Mar

-11

Jul-

11

60

70

80

90

100

110

120

Jan

-90

Feb

-91

Feb

-92

Feb

-93

Feb

-94

Feb

-95

Feb

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Ap

r-0

3

Ap

r-0

4

Ap

r-0

5

Ap

r-0

6

Ap

r-0

7

Ap

r-0

8

May

-09

May

-10

May

-11

15

EU 27 Car registration numbers – Volatile show

Eurozone capital goods index- Recovery of sorts

EU – Slow recovery (cont’d) Auto demand, a key driver for aluminium growth

(~40% of consumption) has remained poor. Thegovernment backed incentive schemes in order toencourage consumers to trade in their older vehicleswith new ones , which was designed to draw downexcessive inventories of unsold vehicles and preventplant closures till demand returned, has failed andwith the end of these schemes, demand has waned.Passenger car registrations fell 8% YoY in CY10, whilede-growing 2% for the 1HCY11.

The machinery and equipment segment whichaccounts for 14% of total aluminium demand, wasthe worst hit, but has shown some recovery in recenttimes.



0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Jan

-06

Jun

-06

No

v-0

6

Ap

r-0

7

Sep

-07

Feb

-08

Jul-

08

Dec

-08

May

-09

Oct

-09

Mar

-10

Au

g-1

0

Jan

-11

Jun

-11

40

60

80

100

120

140

Jan

-85

Feb

-86

Feb

-87

Feb

-88

Feb

-89

Feb

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Ap

r-9

8A

pr-

99

Ap

r-0

0A

pr-

01

Ap

r-0

2A

pr-

03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

Jun

-11

16

Asia (excl China) as a % of World Consumption

India share growing among Asia (excl. China)

Asia – India the Jewel in the Crown The Asia region excluding China witnessed a 11.4%

growth in Aluminium demand in CY10 as against aCAGR growth of 4.5% from CY02-CY10. Goingforward, India is expected to stand out amongstother Asian economies with a growth of ~12% inCY11 and 11% in CY12.

In 2011 and 2012, aluminium consumption in theregion is expected to grow by 7% and 6% respectivelybacked by strong growth in India, South Korea.Demand in Japan has increased post the recentearthquake and premiums paid to suppliers are atnear record levels on increasing imports.

Source: IAI, Industry, IDBI Capital Research

Source: Industry, IDBI Capital Research

17%

18%

19%

20%

21%

22%

23%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

Japan25%

India21%

Others54%

17

Japan PMI – Recovering after the quake

Japanese Auto Production – Future demand driver for the region

Asia – Japan in steady state Japan accounts for 25% of total aluminium

consumption in the Asian region (ex-china). The PMIfor Japan contracted significantly to 29.6 in January2009, the worst as compared to other economies.However, it recovered and crossed the 50 mark in July2009, and currently stands at 51.9. It must be notedthat due to the worst earthquake in its history, PMIfor the month of March and April 2011 dipped to46.4 and 45.7 respectively.

Japanese carmakers produced 9.62mn vehicles inCY10, up 23% YoY. It must be noted that vehicleproduction in 2009 at 7.93 mn was the lowest eversince 1982. However, due to the recent earthquake,vehicle production was the worst hit and dipped 29%YoY in 1HCY11.

Production in April 2011 at 292,001 units was down60.1% YoY and the lowest since 1982 (data rangestart). In our view, over the long term, the Japaneseauto market could be a good demand driver foraluminium on account of increased production ofhybrid cars. Hybrid cars require large amount ofaluminium vis-à-vis normal cars.



20

30

40

50

60

Jan

-04

Jun

-04

No

v-0

4

Ap

r-0

5

Sep

-05

Feb

-06

Jul-

06

Dec

-06

May

-07

Oct

-07

Mar

-08

Au

g-0

8

Jan

-09

Jun

-09

No

v-0

9

Ap

r-1

0

Sep

-10

Feb

-11

Jul-

11

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

18

India Aluminium end users

Capital goods index: In long term growth mode

Asia – India on firm ground India has been quite different from its other Asian

Peers. After an initial fall in manufacturing activity,India has staged a sharp recovery and is the onlyother Asian economy besides China to show a doubledigit growth in aluminium consumption in 2010.

Going forward, government and consumer spendingincluding large infrastructure projects andgovernment led anti poverty schemes will enablealuminium demand in India growing at a rapid pace.The power and automotive sectors are expected tobe a major contributor to this growth.

The solar power market is another growth area forthe sector as aluminium is the material of choice forframes for solar panels. The government is takingsteps to increase investment in solar power and therate of return available to investors in renewableenergy plants, including solar power, was increased inSeptember 2010 from 14-16% to 19-24%.



Power47%

Construction14%

Automobile15%

Packaging9%

Industrial6%

Consumer durable

7%

Others2%

50

100

150

200

250

300

350

400

450

Ap

r-0

5

Oct

-05

Mar

-06

Au

g-0

6

Jan

-07

Jul-

07

Dec

-07

May

-08

Oct

-08

Ap

r-0

9

Sep

-09

Feb

-10

Au

g-1

0

Jan

-11

Jun

-11

19

Monthly aluminium production (kt) – Slow but steady growth

Production – Back on growth path Global Aluminium production has grown at a CAGR of

6.1% from 2002-2010 and has managed to keep pacewith consumption growth. Going forward we expectproduction to grow by 14.4% YoY in 2011 and 6.2% in2012, after a 11.5% growth in 2010.

However, with the addition of capacity in various partsof the world, we believe that the industry willcontinue to see excess capacity in 2011 and 2012.

('000 tons) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

China 4,321 5,547 6,689 7,806 9,349 12,588 13,105 12,965 16,100 19,721 20,843

Growth (%) 28.2 28.4 20.6 16.7 19.8 34.6 4.1 (1.1) 24.2 22.5 5.7

North America & Canada 5,413 5,495 5,110 5,382 5,333 5,642 5,784 4,759 4,693 4,754 4,892

Growth (%) 3.7 1.5 (7.0) 5.3 (0.9) 5.8 2.5 (17.7) (1.4) 1.3 2.9

West Europe 3,928 4,068 4,295 4,352 4,182 4,305 4,625 3,722 3,801 4,038 4,334

Growth (%) 1.1 3.6 5.6 1.3 (3.9) 2.9 7.4 (19.5) 2.1 6.2 7.3

Asia excl China 2,261 2,475 2,735 3,139 3,493 3,717 4,232 4,450 5,592 6,873 7,783

Growth (%) 1.2 9.5 10.5 14.8 11.3 6.4 13.9 5.2 25.7 22.9 13.2

Latin America 2,230 2,275 2,356 2,391 2,493 2,558 2,660 2,507 2,338 2,536 2,651

Growth (%) 12.0 2.0 3.6 1.5 4.3 2.6 4.0 (5.8) (6.7) 8.5 4.5

CIS / East Europe 3,825 3,996 4,139 4,194 4,230 4,460 5,101 4,432 4,529 4,824 5,058

Growth (%) 2.6 4.5 3.6 1.3 0.9 5.4 14.4 (13.1) 2.2 6.5 4.9

Africa & Oceania 3,542 3,626 3,957 4,005 4,138 4,130 4,011 3,893 3,914 4,119 4,201

Growth (%) 1.5 2.4 9.1 1.2 3.3 (0.2) (2.9) (2.9) 0.5 5.2 2.0

World Production 25,520 27,482 29,281 31,269 33,218 37,400 39,518 36,728 40,967 46,865 49,762

Growth (%) 6.7 7.7 6.5 6.8 6.2 12.6 5.7 (7.1) 11.5 14.4 6.2

Source: IAI , Industry, IDBI Capital Research

2,5002,7503,0003,2503,5003,7504,000

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Source: IAI, Bloomberg, IDBI Capital Research

20

China Monthly Aluminium production (kt) – Firing on all cylinders

China as a % of world production – Domination continues

Production – China slowing in line with consumption

Chinese aluminium production has grown at aCAGR of ~19% over the past decade. However,due to high production costs at many smeltersin the country, they have become unviable andhence shut down, some even permanently.Hence, on an overall basis capacity utilizationhas come down significantly and production inthe current year has been slow.

Going forward with significant capacityaddition, we expect growth to come back tohigh levels. We expect production in China togrow by 22.5% in 2011 and 5.7% in 2012 to19.7mn and 20.8mn tonnes respectively.

800900

1,0001,1001,2001,3001,4001,5001,6001,700

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

0%

10%

20%

30%

40%

50%

60%

70%

80%

Feb

-99

Au

g-9

9Fe

b-0

0A

ug-

00

Feb

-01

Au

g-0

1Fe

b-0

2A

ug-

02

Feb

-03

Au

g-0

3Fe

b-0

4A

ug-

04

Feb

-05

Au

g-0

5Fe

b-0

6A

ug-

06

Feb

-07

Au

g-0

7Ja

n-0

8Ju

l-0

8Ja

n-0

9Ju

l-0

9Ja

n-1

0Ju

l-1

0Ja

n-1

1Ju

l-1

1

Source: Bloomberg, IAI, IDBI Capital Research


21

Smelter capacity addition - China Going forward, China is expected to play an increasingly important role in global aluminium production as US and

EU show signs of slowing smelter capacity addition. China’s smelter capacity is expected to increase by ~11mntonnes (~48% of current capacity) by CY17.

Shandong Weiqiao 337 Hengkang Aluminium 177

CPI-Qintonxia 300 Qiya Aluminium Co 176

Yunnan Dongyuan 280 Bautou Aluminum 176

Pingguo Aluminium 263 Longguan Aluminium 173

Zhongfu Lifeng 259 Zhongfu Aluminium 170

Laibin Yinhai 250 Datun Power and Gas 160

Yellow River 250 Huayu Aluminium 138

Shenhou Aluminium 241 Zhaofeng Aluminium 135

Wanji Aluminium 224 Zunyi Aluminium 135

Xinfa Jingxi 215 Guizhou Aluminium 130

Fushan Aluminium 213 Shanxi Guanlu 115

Xinfa Huaxin 211 Shanxi Zhengxing Grp 114

Huomei Hongjun Aluminium 209 Chuangyuan Luye 90

Aba Aluminium 186 Sanmenxia Tianyuan 81

Sichuan Aostar 179 All others 5,419

Total 11,006

Smelter Capacity addition


22

Capacity additions – Asia: Not far behind Asia (excluding China) has been the second fastest region in

terms of production growth. It has seen a CAGR of 10.7% overCY01-CY10 as against a world average of 6.2% and 19% forChina.

This region showed good resilience during the downturn andreported a production growth of 5.2% in 2009 and in turnincreasing its share in global production from 10.7% in CY08 to12.1% in CY09. This jump in production was largely due to lowcosts and increasing capacities. Going forward, this region isexpected to report a growth of 23% in 2011 and 13.2% in 2012.It is expected to add around 7.67mn tonnes of capacity by2015.

Asia (Ex-China) Monthly productionAsia (Ex-China) monthly production (kt)

Company Project Capacity

Dubal - Mubadala EMAL 700,000

Vedanta Jharsuguda II 1,250,000

Hindalco Mahan 359,000

Vedanta Korba III 325,000

Hindalco Aditya 359,000

Hindalco Jharkhand 359,000

Chalco / MMC / Bin Laden Saudi Arabia 350,000

Nalco Indonesia 500,000

Dubal - Mubadala EMAL II 700,000

Alba Line 6 350,000

RTA / ADEWA Sohar II 350,000

RTA / CMS Malaysia 750,000

Hydro / Qatar Petroleum Qatalum II 585,000

Maaden Ras Az Zawr 740,000

Total 7,677,000

200

300

400

500

600

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Source: IAI, Bloomberg, IDBI Capital Research


23

Share in Global Production – Stabilising at current levels

Capacity Utilisation – Continues to be low

Developed World – Showing signs of stability Developed nations have been losing share in total

aluminium production largely due to a fall inproduction over the last decade and a drastic fall in2009 (17.7% in North America and 19.5% in WestEurope). Production has de-grown at a CAGR rate of -1.2% from CY01-CY10 in North America and hasremain flat over the past decade in Western Europe.

We expect North America to show a growth of 1.3%in 2011 and 2.9% in 2012 to 4.75mn and 4.89mntonnes respectively on the back of a recovery in theoverall economic situation. Western Europe isexpected to grow by 6.2% in 2011 and 7.3% in 2012to 4mn and 4.3mn tonnes respectively.

North America, Canada and western Europe haveseen a 3.3% and 7.6% growth in production in thecurrent year till May 2011 on the back of increasingcapacity utilization.

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

North America & Canada West Europe



60%

70%

80%

90%

100%

110%

2003 2004 2005 2006 2007 2008 2009 2010

North America & Canada West Europe

24

Weeks of usage

LME Aluminium Inventory – At all time highs

SHFE Aluminium Inventory – Depleting fast

Inventory – High but…. The fall in demand post the financial crisis led to a

steep jump in inventory on the LME. Currentlyinventory is close to all time highs and way above theaverage of the previous decade. However, inventoryon the SHFE has come down significantly ascompared to its peak levels.

The jump in inventory on the LME is also reflected inthe weeks of usage which increased significantly in2009, but has come off in 2010 on the back ofincreased demand.




0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2002 2003 2004 2005 2006 2007 2008 2009 2010

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

Jul-

98

Jul-

99

Jul-

00

Jul-

01

Jul-

02

Jul-

03

Jul-

04

Au

g-0

5

Au

g-0

6

Au

g-0

7

Au

g-0

8

Au

g-0

9

Au

g-1

0

Au

g-1

1

050,000

100,000150,000200,000250,000300,000350,000400,000450,000

No

v-0

8

Feb

-09

May

-09

Au

g-0

9

No

v-0

9

Feb

-10

May

-10

Au

g-1

0

No

v-1

0

Feb

-11

May

-11

Au

g-1

1

25

…locked in financing deals A large part of the inventory on the LME is locked in

financing deals (carry trade) and remains a feature ofthe aluminium market, with many deals even held inrent agreements. Further, as per data the same isreportedly being rolled over for another year.

The forward prices trading at a significant premium tospot prices led to this phenomenon. The 15-monthforward price premium had jumped to as high as15.6% as against a discount historically.

As aluminium prices go up, premiums could narrowresulting in these financing deals being unwound,and putting pressure on aluminium prices if the sameis available in the market.

Significant premium in CY08 & CY09

Forward premiums close to zero discount



1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jun

-91

Ap

r-9

3

Feb

-95

Dec

-96

Oct

-98

Au

g-0

0

Jun

-02

Ap

r-0

4

Feb

-06

Dec

-07

Oct

-09

Au

g-1

1

Spot Price 15 months forward 27 months forward

0

1,000

2,000

3,000

4,000

(40)%

(20)%

0%

20%

40%

May

-00

Oct

-01

Feb

-03

Jul-

04

Dec

-05

Ap

r-0

7

Sep

-08

Jan

-10

Jun

-11

15 months forward (%) 27 months forward (%) Spot Price

26

Co-relation between inventory and prices broken… The inverse co-relation between Aluminium prices

and the LME inventory was broken off during 2009.The aluminium prices after touching its low inFebruary 2009 has been rising steadily along with theinventory pile up. The jump in the Aluminium priceswas triggered by China’s SRB stocking, increased fundactivity and an artificial shortage created, as a goodamount of inventory is locked up in financing deals.

The other support mechanism for higher prices is thecost curve. Current prices of around US$2,350/tequate to the ~75th percentile of costs with a largeamount of production cash negative. Of this themajority is Chinese production and as such this ismost vulnerable to closure if prices were to dip byeven ~15% from current levels.

Co-relation broken

0

700

1,400

2,100

2,800

3,500

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

Jan

-96

Dec

-96

No

v-9

7

Oct

-98

Sep

-99

Au

g-0

0

Jul-

01

Jun

-02

May

-03

Ap

r-0

4

Mar

-05

Feb

-06

Jan

-07

Dec

-07

No

v-0

8

Oct

-09

Sep

-10

Au

g-1

1

LME Inventory Spot Price

Chinese Aluminium prices continue to trade at a premium

1,000

1,500

2,000

2,500

3,000

3,500

Jul-

03

Jan

-04

Au

g-0

4

Feb

-05

Au

g-0

5

Feb

-06

Au

g-0

6

Feb

-07

Au

g-0

7

Feb

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Feb

-10

Au

g-1

0

Feb

-11

Au

g-1

1

LME Ali Spot (US$/tonne) Shanghai Ali spot (US$/tonne)



27

Executive Summary 3

Industry Section 6




28

Aluminium Price Outlook Commodity prices have seen a sharp rally since

February 2009 after a free fall. However, Aluminiumhas shown relatively less volatility in prices onaccount of its poor fundamentals. This is likely tocushion the Aluminium prices in the event of a fall inprices.

US$ and commodity prices are inversely co-related asreflected from the chart. The depreciating dollarhence supported the commodity price jump recently.In the event of the dollar appreciating against theother currencies, the commodity prices are likely tosee a fall.

We expect the Aluminium price to trade in a band ofUS$2,100/tonne to US$2,600/tonne. Any jump in themetal prices could lead to the unwinding of thefinancing deals and hence exert the pressure on theprices. Further the marginal cost of production andthe SRB buying is likely to act as a support to theprices in case of a downward move.

Aluminium one of the worst performer

Inverse co-relation

1,000

1,500

2,000

2,500

3,000

3,500

40

60

80

100

120

140

Jan

-91

Jan

-92

Jan

-93

Feb

-94

Feb

-95

Feb

-96

Mar

-97

Mar

-98

Mar

-99

Ap

r-0

0

Ap

r-0

1

Ap

r-0

2

May

-03

May

-04

Jun

-05

Jun

-06

Jun

-07

Jul-

08

Jul-

09

Jul-

10

Au

g-1

1

Dollar Index Aluminium price

0

200

400

600

800

1,000

Jan

-94

Dec

-94

Dec

-95

Dec

-96

Dec

-97

No

v-9

8

No

v-9

9

No

v-0

0

Oct

-01

Oct

-02

Oct

-03

Oct

-04

Sep

-05

Sep

-06

Sep

-07

Sep

-08

Au

g-0

9

Au

g-1

0

Au

g-1

1

Aluminium Copper Zinc LeadSource: Bloomberg, IDBI Capital Research


29

Executive Summary 3

Industry Section 6




30

Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%)

FY09 654,146 29,759 4.5 4,839 2.8 36.0 14.6 2.7 (0.1)

FY10 605,484 69,397 11.5 39,111 20.4 5.0 6.0 19.4 8.4

FY11 718,008 80,017 11.1 20,695 10.8 9.5 5.6 7.6 9.2

FY12E 797,531 80,488 10.1 31,567 16.5 6.2 5.7 9.6 8.0

FY13E 855,987 90,906 10.6 34,824 18.2 5.6 4.8 9.6 8.9

Capacity expansion delayed but in sight…

Source: Company, IDBI Capital Research

Hindalco Industries (HNDL IN/HALC.BO)

CMP: Rs145 MCAP: Rs277.5 bn Target: Rs180

BUY

Financial snapshot (Consolidated) (Rs mn)

31

Investment Rationale Hindalco has planned several domestic brownfield and greenfield expansion projects with a total outlay of

~US$9.5 bn over the next few years which upon completion will result in accelerated growth. Despite delays incompletion, its domestic aluminium capacity is slated to grow to 3x by CY15.

Further, in our view lack of visibility on the Mahan coal block which is currently within the MoEF’s ‘No-Go’ areasand is awaiting forest clearance has already been discounted in the recent stock correction, hence any positiveoutcome on that front could improve valuations.

Novelis’s EBITDA has been growing steadily backed by volume jump (due to economic recovery) and cost cuttingactivity. Also, post the cessation of price ceiling can contracts, Novelis has reported buoyant numbers and isreaping benefits of higher aluminium prices unlike in the past. With increasing use of aluminium rolled productsfor automotive body panels in certain geographies, Novelis is slated to be one of the key beneficiaries. We expectNovelis to account for ~55% of consolidated EBITDA by FY13E.

The copper segment performance is expected to improve on the back of firm TC/RC (Treatment and refiningcharges). Going forward this division is expected to continue providing Hindalco with steady cash flows.

We expect Consolidated Revenue, EBITDA and PAT to grow at a CAGR of 9.2%, 6.6% & 29.7% respectively fromFY11-FY13E.

Risks Since the performance of Hindalco is directly linked to that of Aluminium prices and to a small extent to that of

Copper prices, any significant fall in prices could lead to a hit in profitability.

Further delays in completion of greenfield projects.

Rupee appreciation.

32

Outlook and Valuation At CMP, the stock is trading at 5.7x/4.8x FY12E/FY13E EV/EBITDA. Acquisition of Novelis along with inherited loss making

can contracts and slowdown in the economy had put significant pressure on Hindalco’s balance sheet. However, thecompany managed to overcome these shortfalls and successfully came out and we believe will continue to post strongresults going forward backed by investments in fast growing economies of India, Brazil and other Asian countries. Theexpansions in the Indian aluminium business as well as turnaround of Novelis are likely to multiply profits. We expectfinancial leverage to come down to comfortable levels despite Hindalco’s aggressive expansion plans. We expectconsolidated EBITDA to grow at a CAGR of ~7% over FY11-13E and EPS growth to be even higher. We value the Aluminium

major on a SOTP basis and arrive at a target price of Rs180. Initiate coverage with BUY.

(Rs mn) Basis Multiple FY13E

Hindalco

Aluminium EBIDTA 6.5 163,378

Copper (incl ABML) EBIDTA 5.5 86,313

Novelis Adjusted EBIDTA 6.0 300,466

Enterprise Value

550,157

Less: Debt

269,686

Add: Cash & Cash Equivalents

33,850

Target Market Cap.

314,320

Per share (Rs)

164

Investments (Rs) 20% discount to CMP

16.0

Target price (Rs)

180

CMP (Rs)

145

Upside (%)

24

Valuation - FY13E Hindalco has traded at an average of 7.2x 1-yr forward EV/EBITDA

0

2

4

6

8

10

12

14

16

18

Ap

r-0

3

Oct

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Feb

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Feb

-10

Au

g-1

0

Feb

-11

Au

g-1

1

7.2

Source: IDBI Capital Research Source: Bloomberg, IDBI Capital Research

33

Assumptions

FY08 FY09 FY10 FY11 FY12E FY13E

Domestic Aluminium Business

Volumes (Tonnes) 473,118 521,069 555,066 534,400 638,985 800,373

Aluminium Price (US$/tonne) 2,620 2,234 1,865 2,256 2,300 2,300

Blended Realizations (INR/Tonne) 131,154 126,802 110,317 128,533 126,514 122,447

Net Revenues (Rs mn) 68,364 72,500 67,091 76,360 88,144 108,784

Domestic Copper Business

Volumes (Tonnes) 319,211 301,334 331,305 349,807 347,854 362,189

Copper Price (US$/tonne) 7,588 5,885 6,099 8,138 8,250 8,250

Net Revenues (Rs mn) 115,849 103,642 121,605 152,038 167,064 172,985

Novelis Business

Volumes (mn Tonnes) 2.787 2.943 2.854 3.097 3.123 3.273


Realization (USD/Tonne) 3,576 3,458 3,039 3,420 3,636 3,649

Revenues (US$ mn) 11,246 10,177 8,673 10,591 11,355 11,944

EBITDA (US$mn) 533 566 1,085 949 1,030 1,113

EBITDA/tonne (US$) 191 192 380 306 330 340

ABML

Volume Sales (Tonnes) 82,395 70,111 57,093 59,661 66,442 78,402

Copper Price (US$/tonne) 7,588 5,885 6,099 8,138 8,250 8,250

Revenues (US$mn) 664 374 381 463 504 595


34

Domestic Aluminium business – Low cost, high margin Hindalco currently has smelting operations at two

locations in India, Renukoot (390,000TPA) and Hirakud(165,000TPA). Both these smelters are fully integratedwith Captive power plants, bauxite mines and coal mines.Cost of production at Hirakud is ~US$1,400/tonne, whilethat of Renukoot is ~US$1,550/tonne as coal for thepower plant is procured through linkages, e-auction andopen market purchases. However, while most of itsbauxite requirements are met through captive mines, thecompany also buys bauxite from third-party mines tobenefit from low regional pricing and preserve its ownbauxite.

Further, Hindalco is the only aluminium producer in Indiawith high level of sales in the form of value addedproducts(~60%), thus making it less prone to the volatileLME prices. Also, the company is in the process ofrelocating its closed FRP plant at Rogerstone (UK) toHirakud (Orissa) with a capex of US$180 mn. This plant islikely to be commissioned by FY13. This facility has aproduction capacity of 150,000TPA of value addedbeverage can products, and will be later expanded to285,000TPA by 2014. We have assumed that premiumearned on value added products over the LME price willremain largely stable going forward.

(%) FY05 FY06 FY07 FY08 FY09 FY10 FY11

Rolled products 42 35 24 30 41 39 39

Extruded products 49 42 32 43 54 59 53

Redraw rods 18 16 10 12 10 12 13

Foils 119 108 78 97 116 142 110

Premium to LME

Value added as a % of total aluminium sales


50%

55%

60%

65%

70%

75%

FY05 FY06 FY07 FY08 FY09 FY10 FY11


35

Shifting focus to growth

Further delay to adversely affect domestic numbers

Expansion plans delayed but in sight Hindalco’s brownfield (Rogerstone plant transfer,

Hirakud expansion) and greenfield projects (UtkalAlumina, Mahan Aluminium, Aditya Aluminium) haveseen some delays and are expected to becommissioned 3-9 months behind initial completiondates. We have assumed only a small portion of thevolumes from these ventures in our FY12 estimates,while larger benefit accruing in FY13. The companyincurred a capex of Rs65 bn towards its greenfieldprojects in FY11. However, any further delay incommissioning of these projects will adversely effectdomestic earnings.

Financial closure for Utkal Alumina (1.5 mtparefinery) as well as Mahan Aluminium (359ktpasmelter) has been achieved and bauxite mineclearances are in place (sourced from Baphlimalimines 20kms away from site).

Further, in our view lack of visibility on the Mahancoal block which is currently within the MoEF’s ‘No-Go’ areas and is awaiting forest clearance has alreadybeen discounted in the recent stock correction, henceany positive outcome on that front could improvevaluations.

488 500 545

1,263 1,321 1,321 1,321

1,680

1500 1500 1500

3000 3000 3000

45004500

0

1,000

2,000

3,000

4,000

5,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Aluminium (Ktpa) Alumina (Ktpa)

(000 tonnes)

Aluminium

(Ktpa)

Alumina

(Ktpa)

Power Plant

(MW)

Time

Frame

Capex

(Rs bn)

Utkal Alumina - 1,500 90 CY12 71

Mahan

Aluminium 359 - 900 3QFY12 105

Aditya

Aluminium 359 - 900 4QFY12 92

Aditya

Refinery - 1,500 90 CY14 60

Jharkhand

Aluminium 359 - 900 CY15 100



36

Copper margins –Volatile but relatively insignificant

Copper as a % of Domestic PBIT

Copper – Volatile margins but no major impact Hindalco owns and operates three copper smelters

totaling 500,000tpa at Dahej, which is a steadysource of income for the company. Although Hindalcocurrently has no plans to increase capacity further,we believe it will continue contributing ~10% toconsolidated EBITDA over the next couple of years.By-products like sulphuric acid and precious metalswill continue help maintaining profitability even ifTC/RC margins were to dip.

TcRc margins have bounced back from recent lowsand for CY11 Japanese benchmark TCRC stood at14.4c/lb up from 11.9c/lb in CY10. Going forwardcopper processing fees are expected to remain highon the back of smelter shuts in Japan post theearthquake and lower imports by China.

Hindalco owns a 51% stake in Aditya Birla Minerals(ABML) which in-turn owns 100% in Nifty and Gordoncopper mines operating in Australia. 100% outputfrom these mines is used to smelt copper at Dahej.However, it meets only ~10% of Hindalco’sconcentrate requirement.


0%

1%

2%

3%

4%

5%

6%

7%

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

0%

10%

20%

30%

40%

50%

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2


37

Special grade Alumina volumes

Realisation (US$/tonne) – higher realisations to sustain


Special grade Alumina – Low price volatility

Hindalco operates a 350,000 TPA alumina refineryin Belgaum and is an export oriented unit ofmetallurgical alumina and special alumina andhydrates. Prices of special grade alumina is lessvolatile in nature and this unit contributes ~Rs3 bnto EBITDA each year. We expect this trend tocontinue.

0

100,000

200,000

300,000

400,000

500,000


0

100

200

300

400

500

600



38

Novelis – Aluminium prices have marginal impact Aluminium price swings have a limited impact on the

profitability of Novelis due to the nature of itsoperations, and has more so to do with cost cuttingmeasures. However, the impact is restricted to theprofitability of its South American operations and themetal price lag.

Novelis’ South American operations are partially integrated with captive bauxite mine, power plant and aluminaand primary aluminium facility. This has helped the region earn better margins vis-à-vis other regions in Novelis’fold. However, recently the company decided to shut part of its loss making facility (60,000TPA) from31st December 2010 onwards, due to energy supply issues. The shutdown of the plant will not impact Novelis'other operations in Brazil, including its other aluminium smelter at Ouro Preto.

Very low degree of co-relation


PBIT Margins (%) Q1FY12 Q4FY11 Q3FY11 Q2FY11 Q1FY11 Q4FY10 Q3FY10 Q2FY10 Q1FY10 Q4FY09 Q3FY09 Q2FY09 Q1FY09 Q4FY08 Q3FY08 Q2FY08 Q1FY08

North America 9.9 5.6 11.3 12.0 10.5 9.7 12.6 9.1 7.4 4.4 0.1 0.2 3.9 4.9 8.2 8.5 4.0

Europe 9.0 6.5 6.7 11.7 10.5 11.1 8.3 8.2 5.0 2.2 6.6 5.7 9.1 5.2 4.4 6.2 7.3

Asia 10.2 9.9 13.2 16.2 9.6 10.2 10.0 12.6 11.7 1.3 16.0 (0.7) 6.1 2.9 2.3 4.1 (0.8)

South America 11.9 7.4 12.5 13.7 17.7 14.8 11.1 14.3 5.4 4.8 16.6 16.0 15.9 11.0 13.8 19.1 16.4


3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

500

1,000

1,500

2,000

2,500

3,000

3,500

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

(US$

/to

n)

Aluminium prices (LHS) PBIT Margins (%) (RHS)

39

Novelis – Aluminium prices have marginal impact (cont’d)… Profitability of the South American operations have a

direct co-relation with Aluminium prices due to itspartial backward integration into primary aluminiumwhich can be seen in the chart alongside.

South America is one of the fastest growing FRP markets and Novelis has decided to increase its capacity there by~50% (390ktpa to 600ktpa). The company has envisaged a CAPEX of US$300 mn to build a new cold mill and willalso invest in finishing equipment and ancillary improvements. The expansion is likely to be completed by FY13.

Partial backward integration helps it earn better margins


(%) Q1FY12 Q4FY11 Q3FY11 Q2FY11 Q1FY11 Q4FY10 Q3FY10 Q2FY10 Q1FY10 Q4FY09 Q3FY09 Q2FY09 Q1FY09 Q4FY08 Q3FY08 Q2FY08 Q1FY08

Sales 10.2 11.4 12.5 11.0 10.9 10.4 11.1 11.6 10.4 10.6 9.4 10.2 9.5 8.9 9.1 8.6 8.8

EBIT 12.4 12.3 16.8 11.8 18.6 17.9 13.1 16.4 8.9 15.4 24.6 44.0 20.3 18.8 19.9 20.8 25.6

South American Operations Contribution

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

21.0%

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

(US$

/to

n)

Aluminium prices (LHS) PBIT Margins (%) (RHS)


40

Novelis – Turnaround backed by pricing power and cost cutting Performance of Novelis has improved significantly on the

back of cost reduction to the tune of US$140 mn peryear, expiry of price ceiling contracts and return of pricingpower, largely due to changing dynamics of the industry.Novelis reported an Adjusted EBITDA of over US$1 bn inFY11 and going forward we expect this performance tocontinue. However volumes are expected to remain flatin FY12E due to capacity constraints and grow by ~5% inFY13. Recovery in global markets have helped volumesincrease and inturn profitability.

Adjusted EBITDA/tonne stood at US$306/tonne in FY11.We have assumed an EBITDA/tonne of US$330 for FY12Eand US$340 for FY13E.

?

* EBITDA/tonne as it includes unrealised gain on derivates instrument to the tune of US$1,091 mn.

Adjusted EBIDTA – Sustainable at current levels

Operating at Peak capacity

Adjusted EBIDTA per tonne – Stark improvement over the years


0

50

100

150

200

250

300

350

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0*

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

(US$

mn

)

0

100

200

300

400

500

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0*

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

(US$

)

0

150

300

450

600

750

900

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

Ship

men

ts (

00

0 t

on

nes

)

Total N. America Europe Asia S. America

Source: Company, IDBI Capital Research Source: Company, IDBI Capital Research

41

Novelis – Turnaround backed by pricing power and cost cutting (cont’d)

The jump in EBITDA is also due to its rich product mixand pricing power for 70% of its products. Beveragecan feedstock, which accounts for ~60% of its productmix is a specialised and customized product in termsof gauge, finish, width and alloy. Novelis has gained aleadership position in this business. Apart fromNovelis, there are only 3 other players that supplybeverage can feedstock (Alcoa, Aleris and Hydro).Over the past few years, with investment intechnology the focus of all players including Novelishas been to continuously reduce the thickness of thecan body sheet, but maintaining the requiredstrength. This has helped Novelis expand margins dueto higher value addition. As a part of the cost cuttingexercise, the company has also ceased operations ofvarious plants in different geographies.

Plant Region Product Time

Louisville, Kentucky N America Foils Jun-08

Rogerstone, South Wales Europe Rolled Products Apr-09

Ouro Preto, Brazil S America Alumina May-09

Ouro Preto, Brazil S America Aluminium Dec-10

0%

20%

40%

60%

80%

100%

FY07 FY08 FY09 FY10 FY11

North America Europe Asia South America

Premium over LME – Sustainable due to high degree of value add



42

Novelis – Turnaround backed by pricing power and cost cutting (cont’d)

Novelis had entered into metal price ceiling contracts prior to it being acquired by Hindalco. These unfavorablecontracts with key customers did not allow re-pricing of conversion premium and some of these contracts did notallow it to even pass on the increase in LME aluminium prices. This resulted in suppressed margins and heavylosses when LME aluminium prices increased significantly.

Hindalco has not renewed these can contracts and Novelis is now able to negotiate better conversion premiumwith its clients.


Metal Price Ceiling Contracts – Best forgotten

0

100

200

300

400

500

FY07 FY08 FY09 H1FY09 H1FY10

(US$

mn

)

43

Novelis Expansion Plans – Focus on growth Demand for FRP products is strong across the globe and the company expects this momentum to continue over

the long term (2010-2015). Leading the pack would be automobiles which could see growth in excess of 25%,followed by electronics (10-15%) and beverage cans (4-5%). It must be noted that Novelis is operating at near100% capacity utilisation and hence going forward volume growth is possible only through capacity increase.

Novelis plans to expand capacity from the current level of 3mn tonnes to 4mn tonnes by FY16. Over the nextthree years, the company will incur capex of ~US$1.5 bn.

Novelis is investing in fast growing markets like South America (Pinda, Brazil) where it is increasing capacity by50% by end 2012 and South Korea where it is increasing FRP capacity by 300ktpa by 2013.

Location Current Capacity (Ktpa) Post expansion (Ktpa by FY16) Remarks

North America 1,100 1,360 Automotive capacity increase by ~200ktpa + ~60ktpa de-bottlenecking

South America 400 650 Brazil Expansion ~220ktpa + ~30ktpa de-bottlenecking

Europe 900 990 De-bottlenecking ~90ktpa

Asia 600 1,000 ~350ktpa expansion + ~70ktpa de-bottlenecking

Total 3,000 4,000

Novelis capacity expansion – In response to projected market growth


44

Reducing Leverage Acquisition of Novelis had put significant pressure on Hindalco’s balance sheet with Debt: Equity ratio rising from

0.5x in FY04 to a peak of 1.9x in FY08. However, the same has come down to 1x in FY11 on the back of significantimprovement in cash flows and we expect it to drop further going forward despite huge capex plans.


Debt Equity – At comfortable levels

0.5 0.6 0.7 0.7

1.9 1.8

1.1 1.0

0.9 0.8

0.0

0.4

0.8

1.2

1.6

2.0

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

45

Outlook and Valuation At CMP, the stock is trading at 5.7x/4.8x FY12E/FY13E EV/EBITDA. Acquisition of Novelis along with inherited loss making

can contracts and slowdown in the economy had put significant pressure on Hindalco’s balance sheet. However, thecompany managed to overcome these shortfalls and successfully came out and we believe will continue to post strongresults going forward backed by investments in fast growing economies of India, Brazil and other Asian countries. Theexpansions in the Indian aluminium business as well as turnaround of Novelis are likely to multiply profits. We expectfinancial leverage to come down to comfortable levels despite Hindalco’s aggressive expansion plans. We expectconsolidated EBITDA to grow at a CAGR of ~7% over FY11-13E and EPS growth to be even higher. We value the Aluminium

major on a SOTP basis and arrive at a target price of Rs180. Initiate coverage with BUY.

(Rs mn) Basis Multiple FY13E

Hindalco

Aluminium EBIDTA 6.5 163,378

Copper (incl ABML) EBIDTA 5.5 86,313

Novelis Adjusted EBIDTA 6.0 300,466

Enterprise Value

550,157

Less: Debt

269,686

Add: Cash & Cash Equivalents

33,850

Target Market Cap.

314,320

Per share (Rs)

164

Investments (Rs) 20% discount to CMP

16.0

Target price (Rs)

180

CMP (Rs)

145

Upside (%)

24

Valuation - FY13E Hindalco has traded at an average of 7.2x 1-yr forward EV/EBITDA

0

2

4

6

8

10

12

14

16

18

Ap

r-0

3

Oct

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Feb

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Feb

-10

Au

g-1

0

Feb

-11

Au

g-1

1

7.2

Source: IDBI Capital Research Source: Bloomberg, IDBI Capital Research

46

Comparative Valuation

Revenue (Rs.bn) EBITDA (Rs. bn) PAT (Rs. bn) EV/EBITDA (x)

Company

Mkt Cap

(Rs.bn)

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

Rio Tinto PLC 5,442 2,587 3,098 3,295 1,040 1,472 1,550 655 842 889 9.5 6.7 6.4

Alcoa Inc 590 961 1,162 1,206 124 194 214 12 62 71 9.3 6.0 5.4

Xstrata PLC 2,252 1,395 1,693 1,841 475 623 719 214 325 384 9.2 7.0 6.0

BHP Billiton Ltd 8,957 3,253 3,839 3,994 1,654 2,110 2,158 1,072 1,196 1,202 5.8 4.5 4.4

United Co RUSAL PLC 748 502 591 629 56 142 143 131 120 127 2.9 1.2 1.2

Norsk Hydro ASA 518 573 824 879 51 125 128 14 52 56 12.0 4.9 4.8

Century Aluminum Co 49 53 66 71 8 10 13 3 4 7 6.6 5.2 4.0

Vedanta Resources PLC 272 521 762 889 159 270 336 35 75 95 7.4 4.4 3.5

Sterlite Industries India Ltd 426 302 398 456 78 118 139 50 67 81 7.0 4.6 3.9

Vale SA 6,568 2,165 2,964 3,001 1,203 1,785 1,807 782 1,220 1,130 6.0 4.1 4.0

Glencore International PLC 2,191 6,629 8,499 8,926 205 392 523 172 245 318 26.3 13.7 10.3

Hindalco Industries Ltd* 278 718 798 856 80 80 91 21 32 35 5.6 5.7 4.8

National Aluminium Co Ltd* 166 60 64 66 16 16 17 11 11 12 7.2 6.6 5.7

* IDBI Capital Research EstimatesSource: Bloomberg, IDBI Capital Research

Hindalco is trading in-line with global peer median, however we believe it

warrants a premium considering its low cost of production and quantum jump in

volumes going forward

47

Financial Summary

Year-end: March FY10 FY11 FY12E FY13E

Net sales 605,484 718,008 797,531 855,987

Growth (%) (7.4) 18.6 11.1 7.3

Operating expenses (537,682) (640,762) (719,622) (767,914)

EBITDA 69,397 80,017 80,488 90,906

Growth (%) 133.2 15.3 0.6 12.9

Depreciation (27,836) (27,500) (29,141) (31,140)

EBIT 41,561 52,517 51,347 59,766

Interest paid (14,085) (18,393) (12,744) (14,579)

Other income 3,227 4,309 4,500 4,652

Pre-tax profit 30,703 38,432 43,102 49,839

Tax (18,289) (9,638) (9,743) (12,718)

Effective tax rate (%) 59.6 25.1 22.6 25.5

Net profit 12,414 28,794 33,360 37,121

Adjusted net profit 39,111 20,695 31,567 34,824

Growth (%) 708.3 (47.1) 52.5 10.3

Shares o/s (mn nos) 1,914 1,915 1,915 1,915

Income statement (Rs mn) Balance Sheet (Rs mn)


Net fixed assets 348,013 455,361 537,549 550,369

Investments 112,455 108,549 86,839 82,497

Current assets 231,884 279,848 273,212 311,874

Inventories 112,754 140,956 149,712 156,732

Sundry Debtors 65,437 79,996 81,701 88,625

Cash and Bank 21,954 25,563 8,906 33,850

Loans and advances 31,171 31,989 31,989 31,989

Total assets 692,353 843,758 897,600 944,740

Shareholders' funds 232,818 312,402 344,266 379,838

Share capital 1,914 1,915 1,915 1,915

Reserves & surplus 213,533 288,318 316,674 348,138

Total Debt 239,987 276,920 274,928 269,686

Secured loans 107,627 137,358 274,928 269,686

Unsecured loans 132,360 139,562 - -

Other liabilities 279,369 314,516 309,531 304,289

Curr Liab & prov 229,335 268,989 295,952 315,369

Current liabilities 180,166 216,840 243,803 260,613

Provisions 49,170 52,149 52,149 54,756

Total liabilities 459,535 531,356 553,334 564,902

Total equity & liabilities 692,353 843,758 897,600 944,740

Book Value (Rs) 122 163 180 198

48

Financial Summary (cont’d)


Pre-tax profit 30,703 38,432 43,102 49,839

Depreciation 22,177 (8,202) 66,091 31,140

Tax paid (6,478) (11,425) (12,736) (12,718)

Chg in working capital (21,553) (6,904) 16,501 2,866

Cash flow from operations (a) 24,849 11,901 112,958 71,127

Capital expenditure (22,539) (99,146) (148,279) (43,960)

Chg in investments (8,147) 3,907 21,710 4,342

Cash flow from investing (b) (30,687) (95,239) (126,569) (39,618)

Equity raised/(repaid) 25,845 6 (75) -

Debt raised/(repaid) (43,111) 36,933 (1,992) (5,242)

Dividend (incl. tax) 3,012 3,338 3,136 3,360

Chg in minorities (302) 568 1,715 2,383

Cash flow from financing (c) (14,555) 40,844 2,784 501

Net chg in cash (a+b+c) (20,392) (42,494) (10,826) 32,010


Adj EPS (Rs) 20.4 10.8 16.5 18.2

Adj EPS growth (%) 618.2 (47.1) 52.5 10.3

EBITDA margin (%) 11.5 11.1 10.1 10.6

Pre-tax margin (%) 5.1 5.4 5.4 5.8

ROE (%) 19.4 7.6 9.6 9.6

ROCE (%) 8.4 9.2 8.0 8.9

Turnover & Leverage ratios (x)

Asset turnover (x) 0.9 0.9 0.9 0.9

Leverage factor (x) 3.3 2.8 2.7 2.5

Net margin (%) 6.5 2.9 4.0 4.1

Net Debt/Equity (x) 0.9 0.8 0.8 0.6

Working Capital & Liquidity ratio

Inventory days 68 72 69 67

Receivable days 39 41 37 38

Payable days 0 0 0 0

Valuation


PER (x) 5.0 9.5 6.2 5.6

Price/Book value (x) 0.8 0.6 0.6 0.5

PCE (x) 2.9 4.1 3.2 3.0

EV/Net sales (x) 0.7 0.6 0.6 0.5

EV/EBITDA (x) 6.0 5.6 5.7 4.8

Dividend Yield (%) (0.9) (1.0) (1.0) (1.0)

Cash Flow Statement (Rs mn) Financial Ratios (Rs mn)

49

Higher Coal costs to hit profitability

NALCO (NACL IN / NALU.BO)

CMP: Rs65 MCAP: Rs166.6 bn Target: Rs70

ACCUMULATE

Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%)

FY09 50,945 17,902 35.1 12,585 4.9 13.2 7.2 13.5 15.3

FY10 50,557 10,907 21.6 8,025 3.1 20.8 11.5 8.0 7.2

FY11 59,590 15,941 26.8 10,703 4.2 15.6 7.2 9.9 10.1

FY12E 64,140 16,311 25.4 11,471 4.5 14.5 6.6 9.9 9.3

FY13E 66,499 17,377 26.1 12,370 4.8 13.5 5.7 9.9 9.2

Financial snapshot (Rs mn)


50

Investment Rationale Stock trading at premium, and risk reward ratio is not favorable at the current price.

Capacity addition in alumina but not in end metal (aluminium). This will limit profitability.

Cost of Production of Aluminium is quite high, despite alumina cost being one of the lowest in the world.

Coal India has increased coal prices by 32% for FY12. This along with supply issues, should see the companyresorting to import coal and also buy additional power from the grid to meets it requirement. Delay in Utkal-Ecoal block development could lead to further dependence on outside coal. It must be noted that the companyhas received environmental clearance , but is yet in the process of land acquisition and rehabilitation.

We expect Revenue, EBITDA & PAT to grow at a CAGR of 5.6%, 4.4% & 7.5% respectively.

Risks Commodity price risks of higher than expected alumina and aluminium prices.

Exchange rate risk – Rupee depreciation against the dollar is a positive for the company.


Alumina Sales Volumes (Tonnes) 864,988 865,000 746,974 681,917 1,008,231 1,033,200

Aluminium Sales Volumes (Tonnes) 343,911 338,015 419,055 418,827 423,936 441,784

Alumina Price (US$/tonne) 360 325 284 327 350 350



Assumptions

51

Outlook and Valuation At CMP, the stock is trading at 6.6x/5.7x FY12E/FY13E EV/EBITDA. Nalco lacks volume growth in terms of end

metal (ingots) business. Also, despite having one of the leanest cost structures for Alumina, the same is notreflected in smelter cost of production. However, the stock trades at a premium as compared to its domestic aswell as global peers which in our view is not justifiable considering its raw material (thermal coal) supply issues.We expect consolidated EBITDA to grow at a CAGR of 6% over FY11-13E and EPS growth to be marginally higher.We value NALCO on an EV/EBITDA basis and arrive at a target price of Rs70. Initiate coverage with ACCUMULATE.

FY13E

EBIDTA (Rs mn) 17,377

EBIDTA Multiple (x) 6.5

EV (Rs mn) 112,950

Less Net Debt: Cash & Liquid investments (Rs mn) (68,344)

Target Market Cap (Rs mn) 181,295

Target price (Rs) 70

CMP (Rs) 65

Upside (%) 9

Valuation - FY13E Premium valuation unjustifiable

0

2

4

6

8

10

12

14

16

18

20

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

8.0

Source: Bloomberg, IDBI Capital ResearchSource: IDBI Capital Research

52

Alumina – Will continue to remain the mainstay for the company

NALCO is one of the lowest cost producers of Aluminain the world, due to its high grade captive bauxitemines. It managed to weather the recent downturnwhen prices fell as low as US$178/tonne.

The company recently commissioned its new Aluminarefinery, increasing capacity from 1.575MTPA to2.1MTPA. The company plans to further increasecapacity to 2.275MTPA through de-bottlenecking byFY13.

Further, the company has been recently grantedmining licenses in AP for Gudem and KatamrajuKonda mines with estimated bauxite reserves of85mn tonnes. Nalco has plans to set up a 1.4MTPArefinery with an estimated investment of Rs60 bn.However, this greenfield refinery is yet to commenceconstruction.

Bauxite 3,503

Caustic Soda 1,454

Power and Fuel 826

Staff Cost 1,907

Other overheads 1,687

Total cost of alumina production 9,376

Cost (US$/ton) 206

Cost of Alumina Production (FY11) (excl. depreciation) (Rs/ton)

Alumina quarterly performance – Share to increase going forward


0%

30%

60%

90%

120%

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

PBIT Margins as a % of total PBT


53

Alumina prices expected to remain firm In our view, with bauxite and alumina increasingly being purchased by new smelters in China and the Middle East

that do not have captive raw material sources, an open market price will slowly become more viable and morerelevant. As per our understanding, alumina at least will become increasingly important for aluminium buyers totrack as another fundamental price driver.

Further, like Iron ore and Coking coal, which has moved towards a quarterly pricing system, some of the worldslargest alumina players are trying the same to benefit from higher spot prices.

We have assumed an alumina price of US$350 per tonne for FY12E and FY13E.

Alumina Prices (US$/tonne) – Exhibiting strength

0

100

200

300

400

500

600

700

Sep

-94

Jul-

95

May

-96

Mar

-97

Jan

-98

No

v-9

8

Sep

-99

Jul-

00

May

-01

Mar

-02

Jan

-03

No

v-0

3

Sep

-04

Jul-

05

May

-06

Mar

-07

Jan

-08

No

v-0

8

Sep

-09

Jul-

10

May

-11

Alumina as a % of Aluminium prices – moving in a narrow band

0%

5%

10%

15%

20%

25%

30%

35%

Sep

-94

Jul-

95

May

-96

Mar

-97

Jan

-98

No

v-9

8

Sep

-99

Jul-

00

May

-01

Mar

-02

Jan

-03

No

v-0

3

Sep

-04

Jul-

05

May

-06

Mar

-07

Jan

-08

No

v-0

8

Sep

-09

Jul-

10

May

-11

Source: Bloomberg, IDBI Capital ResearchSource: Bloomberg, IDBI Capital Research

54

(Rs/ton)

As a % of total costs

Alumina Cost 18,163 18.4

Power cost 39,207 39.6

Aluminum Floride 1,057 1.1

Calcined Petroleum Coke 7,549 7.6

Hard/Soft Pitched Coke 2,397 2.4

Other materials 1,168 1.2

Employee expenses 15,607 15.8

Other expenses 13,804 14.0

Total cost of Aluminium production 98,952

Cost in US$/ton 2,175

Aluminium – Poor show… Nalco’s Aluminium cost structure does not reflect its

world class low alumina cost of production. This is largelydue to high power and fuel costs along with otheroverheads (employee and other costs). Nalco continuesto face power cost pressure periodically. Power costshave risen significantly over the years, partly due to lowersupply of low cost linkage coal from Coal India, forcingNalco to import coal and also buy additional power fromthe grid to meet its requirement. Further, Coal India hasraised coal prices by 32% YoY for FY12E to~Rs1,830/tonne. It must be noted that coal prices in FY10were ~Rs800/tonne. We have assumed per unit powercost of ~Rs2.8 in FY12E and FY13E respectively.

Source:

Employee cost - At all time high

Cost of Aluminium Production (FY11)

Aluminium & Power quarterly – Volatile performance


(80)%(60)%(40)%(20)%

0%20%40%60%80%

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

PBIT Margins as a % of total PBT

4,000

8,000

12,000

16,000

20,000

4%

8%

12%

16%

20%


Employee costs as a % of sales (LHS) Employee costs per ton (RHS)

55

Power cost as a % of sales

Power & fuel cost per unit of generation (Rs) – Heading North


… due to high power costs Power and fuel costs has been the main dampener

for the company’s dismal aluminium profitability.Power and fuel costs as a % of sales have almostdoubled over the past few years.

This Jump in power costs is largely on account ofinconsistency in coal supplies from Coal India forcingthe company to either import high cost coal or buyexpensive power from the grid.

NALCO has been allotted the Utkal-E coal block whichhas reserves of 70mn tonnes to partially meet thecompany’s 6.6mn tonnes per annum coalrequirement. However, while there has already beensignificant delay in developing the coal block and thegovernment even contemplating to cancel theallocation of the block on account of this delay, thecompany has yet only managed to get theenvironmental clearance and is yet in the process ofland acquisition and rehabilitation.


10%

20%

30%

40%

50%

Q1

FY0

8

Q2

FY0

8

Q3

FY0

8

Q4

FY0

8

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

Q2

FY1

1

Q3

FY1

1

Q4

FY1

1

Q1

FY1

2

1.0

1.5

2.0

2.5

3.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

56

Expansion Plans – Commissioned after much delay Nalco recently commissioned its Phase II expansion plan. The company has increased its bauxite mining capacity

from 4.8mtpa to 6.3mtpa, Alumina capacity from 1.575mtpa to 2.1mtpa, Aluminium smelting capacity (alreadycomplete) from 0.345mtpa to 0.46mtpa and captive power from 960MW to 1200MW. The company incurredCAPEX of Rs44 bn towards this Phase II expansion.

Apart from domestic expansion, Nalco is also looking at setting up a 0.5mtpa aluminium smelter and 1250MWcaptive power plant in Indonesia in two phases. The estimated investment for the same is ~US$3.5 bn. Thecompany has partnered with UAE based RAK minerals for the same and work on the same is expected to start bythe current fiscal.

Source:

Alumina Sales – Quantum leap expected Aluminium Sales – Marginal growth


600,000

700,000

800,000

900,000

1,000,000

1,100,000


(To

nn

es)

300,000

350,000

400,000

450,000

500,000


(To

nn

es)

57

Value added products as a % of total metal sales is low


Capacity utilisation of value added products – At dismal levels Value added premium over ingots

Source: Source: Company, IDBI Capital Research

Focus continues to be on run of the mill products Nalco’s product offering is largely skewed towards

low end (negligible value add) products like Aluminaand ingots, unlike its domestic peer Hindalco whichhas been focusing on high margin value-addedproducts.

Value added products for NALCO accounts for lessthan 5% of total metal sales as compared to ~60% incase of Hindalco.


0%

9%

18%

27%

36%

45%

54%

0%

20%

40%

60%

80%

100%

120%


Hindalco (LHS) NALCO (RHS)

-8%

0%

8%

16%

24%

32%

0%

20%

40%

60%

80%


Hindalco (LHS) NALCO (RHS)

0%

20%

40%

60%

80%

100%

120%


Rolled products Extruded products Foils

58

Outlook and Valuation At CMP, the stock is trading at 6.6x/5.7x FY12E/FY13E EV/EBITDA. Nalco lacks volume growth in terms of end

metal (ingots) business. Also, despite having one of the leanest cost structures for Alumina, the same is notreflected in smelter cost of production. However, the stock trades at a premium as compared to its domestic aswell as global peers which in our view is not justifiable considering its raw material (thermal coal) supply issues.We expect consolidated EBITDA to grow at a CAGR of 6% over FY11-13E and EPS growth to be marginally higher.We value NALCO on an EV/EBITDA basis and arrive at a target price of Rs70. Initiate coverage with ACCUMULATE.

FY13E

EBIDTA (Rs mn) 17,377

EBIDTA Multiple (x) 6.5

EV (Rs mn) 112,950

Less Net Debt: Cash & Liquid investments (Rs mn) (68,344)

Target Market Cap (Rs mn) 181,295

Target price (Rs) 70

CMP (Rs) 65

Upside (%) 9

Valuation - FY13E Premium valuation unjustifiable

0

2

4

6

8

10

12

14

16

18

20

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

8.0

Source: Bloomberg, IDBI Capital ResearchSource: IDBI Capital Research

59

Comparative Valuation

Revenue (Rs.bn) EBITDA (Rs. bn) PAT (Rs. bn) EV/EBITDA (x)

Company

Mkt Cap

(Rs.bn)

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

CY10 /

FY11

CY11E /

FY12E

CY12E /

FY13E

Rio Tinto PLC 5,442 2,587 3,098 3,295 1,040 1,472 1,550 655 842 889 9.5 6.7 6.4

Alcoa Inc 590 961 1,162 1,206 124 194 214 12 62 71 9.3 6.0 5.4

Xstrata PLC 2,252 1,395 1,693 1,841 475 623 719 214 325 384 9.2 7.0 6.0

BHP Billiton Ltd 8,957 3,253 3,839 3,994 1,654 2,110 2,158 1,072 1,196 1,202 5.8 4.5 4.4

United Co RUSAL PLC 748 502 591 629 56 142 143 131 120 127 2.9 1.2 1.2

Norsk Hydro ASA 518 573 824 879 51 125 128 14 52 56 12.0 4.9 4.8

Century Aluminum Co 49 53 66 71 8 10 13 3 4 7 6.6 5.2 4.0

Vedanta Resources PLC 272 521 762 889 159 270 336 35 75 95 7.4 4.4 3.5

Sterlite Industries India Ltd 426 302 398 456 78 118 139 50 67 81 7.0 4.6 3.9

Vale SA 6,568 2,165 2,964 3,001 1,203 1,785 1,807 782 1,220 1,130 6.0 4.1 4.0

Glencore International PLC 2,191 6,629 8,499 8,926 205 392 523 172 245 318 26.3 13.7 10.3

Hindalco Industries Ltd* 278 718 798 856 80 80 91 21 32 35 5.6 5.7 4.8

National Aluminium Co Ltd* 166 60 64 66 16 16 17 11 11 12 7.2 6.6 5.7

* IDBI Capital Research EstimatesSource: Bloomberg, IDBI Capital Research

NALCO is trading at a premium over its domestic as well as

some international peers which we feel is unwarranted

60

Financial Summary


Net sales 50,557 59,590 64,140 66,499

Growth (%) (0.8) 17.9 7.6 3.7

Operating expenses (40,838) (44,617) (48,923) (50,435)

EBITDA 10,907 15,941 16,311 17,377

Growth (%) (39.1) 46.2 2.3 6.5

Depreciation (3,194) (4,301) (4,837) (5,204)

EBIT 7,713 11,640 11,474 12,173

Interest paid (23) (1) - -

Other income 3,741 3,617 4,893 5,536

Pre-tax profit 11,549 15,247 16,367 17,708

Tax (3,406) (4,554) (4,897) (5,339)

Effective tax rate (%) 29.5 29.9 29.9 30.1

Net profit 8,142 10,693 11,471 12,370

Adjusted net profit 8,025 10,703 11,471 12,370

Growth (%) (36.2) 33.4 7.2 7.8

Shares o/s (mn nos) 2,577 2,577 2,577 2,577


Net fixed assets 70,797 72,371 78,034 80,329

Investments - - - -

Current assets 61,964 73,768 81,250 89,942

Inventories 9,449 10,585 11,567 11,665

Sundry Debtors 1,818 1,124 1,318 1,412

Cash and Bank 31,524 37,952 45,021 52,231

Loans and advances 7,856 9,152 8,695 8,521

Total assets 132,761 146,139 159,283 170,272

Shareholders' funds 103,956 111,646 120,403 129,758

Share capital 12,886 12,886 12,886 12,886

Reserves & surplus 91,070 98,760 107,517 116,871

Total Debt 86 149 - -

Secured loans 86 149 - -

Other liabilities 6,692 7,083 7,085 7,235

Curr Liab & prov 25,813 31,274 36,047 37,956

Current liabilities 22,113 27,410 31,796 33,280

Provisions 3,700 3,865 4,251 4,677

Total liabilities 28,805 34,493 38,880 40,514

Total equity & liabilities 132,761 146,139 159,283 170,272

Book Value (Rs) 40 43 47 50

Income statement (Rs mn) Balance Sheet (Rs mn)

61

Financial Summary (cont’d)


Pre-tax profit 11,549 15,247 16,367 17,708

Depreciation 3,134 4,010 4,837 5,204

Tax paid (3,014) (4,225) (4,747) (5,189)

Chg in working capital 256 3,558 3,667 1,466

Cash flow from operations (a) 11,924 18,590 20,125 19,190

Capital expenditure (4,934) (5,583) (10,500) (7,500)

Cash flow from investing (b) (5,842) (9,032) (11,832) (8,965)

Debt raised/(repaid) 86 63 (149) -

Dividend (incl. tax) (1,885) (3,003) (2,714) (3,015)

Cash flow from financing (c) (1,799) (2,940) (2,863) (3,015)

Net chg in cash (a+b+c) 4,283 6,617 5,431 7,210


Adj EPS (Rs) 3.1 4.2 4.5 4.8

Adj EPS growth (%) (36.2) 33.4 7.2 7.8

EBITDA margin (%) 21.6 26.8 25.4 26.1

Pre-tax margin (%) 22.8 25.6 25.5 26.6

ROE (%) 8.0 9.9 9.9 9.9

ROCE (%) 7.2 10.1 9.3 9.2

Turnover & Leverage ratios (x)

Asset turnover (x) 0.4 0.4 0.4 0.4

Leverage factor (x) 1.3 1.3 1.3 1.3

Net margin (%) 15.9 18.0 17.9 18.6

Net Debt/Equity (x) (0.4) (0.5) (0.5) (0.5)

Working Capital & Liquidity ratio

Inventory days 68 65 66 64

Receivable days 13 7 8 8

Payable days 165 193 206 207

Valuation


PER (x) 20.8 15.6 14.5 13.5

Price/Book value (x) 1.6 1.5 1.4 1.3

PCE (x) 14.9 11.1 10.2 9.5

EV/Net sales (x) 2.5 1.9 1.7 1.5

EV/EBITDA (x) 11.5 7.2 6.6 5.7

Dividend Yield (%) 1.0 1.5 1.4 1.5

Cash Flow Statement (Rs mn) Financial Ratios (Rs mn)

62

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