Sec

Secttor Updat
Updat e
ate
13th Januar
anuaryy 2009

Aluminium Sector
Pankaj Bobade
pankaj.bobade@relianceada.com
Tel.: +91-22-30443319

Poonam Bisht
poonam.bisht@relianceada.com
Tel.: +91-22-30443318
Aluminium Sector in a dilemma…
The current business scenario in the global aluminium sector has turned gloomy
following a sharp decline in prices despite gallant attempts to salvage the situation.
The Aluminium sector has reached its new climax with prices having corrected sharply
from $ 3305/tonne during July '08, to a new low of $1490/tonne in Dec'08. The aluminium
sector is faced with tough times ahead on account of build up in inventory position
indicating surplus supply and fall in price due to demand slowdown.

Industry-wise consumption of Aluminium in CY07.

10% 9%
4%

12%

28%
15%

22%

Transport Construction Pack aging Electrical

Engineering Consumer durables Others

Construction, Transport and Source: Reliance Money Research

Packaging industry accounts for about
65% of industry wise consumption of
Aluminium while Europe, N. America
and China contribute 71% of the
annual consumption.
Construction, Transport and Packaging industry accounts for about 65% of industry
wise consumption of Aluminium while Europe, N. America and China contribute 71%
of the annual consumption. The three sectors and three geographical areas are the
worst hit by the global slowdown. This has prompted a fall in consumption leading to
inventory built up on all three exchanges.

Break-up of Aluminium consumption -geographically

20%
9%

33%
21%

17%

Europe (Ex Russia) N America China Asia (Ex China) Rest of World

Source: Reliance Money Research

Contd...
 13th January 2009

Aluminium Inventory and Price trend

2,600,000 $3,600

2,400,000 $3,100

2,200,000
$2,600

2,000,000
$2,100

($/tonne)
(Tonne)
1,800,000
$1,600
1,600,000
$1,100
1,400,000

1,200,000 $600

1,000,000 $100

08 -0
8
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8
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8
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n- eb ar ay ug ep t-0 v- ec
-Ja -F -M -Ap -M 1 -Ju -A -S -Oc -No -D
02 06 12 18 27 0 05 10 15 19 29
The price of alumina has drastically Inventory Aluminium Price
fallen from all time high of $ 435/tonne
Source: LME/Reliance Money Research
in July '08 to as low as $ 225/tonne in
Dec '08. Alumina, which is key intermediate for the production of aluminium, accounts for 32% of
total aluminium cost for integrated producers. The price of alumina has drastically fallen
from all time high of $ 435/tonne in July '08 to as low as $ 225/tonne in Dec '08. Further
decline in price of alumina would take away the support which integrated aluminium
producers were deriving by selling them separately. Though for non-integrated aluminium
producers it will help in reducing their marginal cost of production to a certain extent.

Price trend of Alumina

500
450
400
350
300
($/Tonne)

250
200
150
100
50
0
8
8

08
08

08

08

08
8

8
08

08

8
-0
-0

r-0

l- 0

-0

v-
g-

p-

c-
n-

n-
b-

ay
ar

ct
Ju
Ap

No

De
Fe

Au

Se
Ja

Ju
M

O
M

2-
2-
2-

2-

2-

2-

2-
2-

2-

2-

2-

2-

Alumina

Source: Bloomberg/Reliance Money Research

Contd...
2
 13th January 2009

Demand & Supply Scenario

Vulnerable Demand Situation
Global demand growth for aluminium has reduced sharply from its peak of 7.4% y-o-y
in CY07 to 3.9% y-o-y in CY08E and is expected to reach a new low 2.6% y-o-y in
CY09E. China, which accounts for 33% of global aluminium trade, is witnessing fall in
demand from 39% y-o-y growth in CY07 to 9% y-o-y growth in CY08E. While, the
aluminium demand from rest of world has also shown miniscule improvement over the
pervious year. But, China still has drag effect on the rest of the world because it was
China that had driven about 80% of the incremental demand in CY07.

Growth in world's aluminium demand

50.0%

40.0%

30.0%
Expected (%) growth (YoY)

20.0%

10.0%

0.0%

Asia (less China, Japan)

Africa

Japan
CIS
N America

S America

Australia

East Europe

China

Global demand
Middle East
W Europe

-10.0%

-20.0%

-30.0%

-40.0%

2007 Y oY gr.(% ) 2008 Y oY gr.(% ) 2009 Y oY gr.(% )

Source: Reliance Money Research

Automobile and construction industries

Built up Inventories is further worsening the situation….
Automobile and construction industries along with packaging industry which account
along with packaging industry which
for 65% of the total Aluminium consumption, are experiencing recession due to the
account for 65% of the total Aluminium
global economy slowdown. So, slump in these industries have directly impacted the
consumption, are experiencing
demand of aluminium sector at large. Further, to worsen the situation there has been a
recession due to the global economy
significant decline in prices of aluminium from high of $ 3000/ton in July '08 to $1500/
slowdown.
ton in Dec '08.

CRU Aluminium Cash Cost Curve

Source: Reliance Money Research

Contd...
3

It is expected that inventory level will
rise from 0.32 Mn tonne in CY07 to 4.6
Mn tonne in CY09E.
The total global aluminium production-
cuts, which amount to 6.82 mn tpa, in
which China accounts for 4.05 mn tpa
of aluminium production-cuts and
balance by rest of the world has been
undertaken.
13th January 2009
The cost of producing aluminium ranges from $1100-$2700/tonne for different
producers. Any fall in the price below their cost of production will force the aluminium
producers to shut down the operations. Of late, India's Madras Aluminium - a Vedanta
group company has temporarily shut down its capacity as its' cost of production is
above the current LME Aluminium price and it finds selling the power produced a
profitable proposition value than using it for producing Aluminium. The combined effects
of global slowdown and fall in price of aluminium have led to increase the global
Aluminium inventory. It is expected that inventory level will rise from 0.32 Mn tonne in
CY07 to 4.6 Mn tonne in CY09E. The current inventory in all three exchanges is in the
vicinity of 2.5mn tonnes.
Global Metal Balance for Aluminium
Metal Balance
5000
4648
4000
3000
('000 tonne)
2501
2000
1000
-524 324
0
2006 2007 2008E 2009E
-1000
Source: Reliance Money Research
Effects of global demand & supply situation on global
aluminium players
It was earlier expected that global aluminium production would be 41.8 Mn tonne,
while the consumption would be 41.2 Mn tonne in CY08E-a mere surplus of about 0.5
mn tonne and about 0.2 mn tonne surplus in FY09E. But the aftermath of global
slowdown has led to built up of inventory position to upwards of 2 mn tonne in CY08;
this in turn resulted in drastic fall in price of aluminium to $ 1500/tonne in Dec 08. A
similar surplus of 4.6 mn tonne is expected in CY09.
In order to rationalize the current scenario of increase in inventory position and fall in
price of aluminium have resulted in massive production-cuts and delay in capex plans
by many companies across the world. The total global aluminium production-cuts, which
amount to 6.82 mn tpa, in which China accounts for 4.05 mn tpa of aluminium production-
cuts and balance by rest of the world has been undertaken. It is anticipated that such
action of production-cuts and capex plans delays across the world will help in filling the
gap between demand and supply situation. Thus, this may enable the world aluminium
price to reach at its rationale level.
Contd...
4
 13th January 2009

Global Output cuts in CY09

11%
2%
1% 0%
2% 48%
2%

9%

25%

Chalco Chinese Small Aluminium Producers

Others Global Players Alcoa
Vimetco US Rusal
Vale Vedanta
Norsk Hydro

Note: Total global Aluminum output cut for CY09 is expected to be 6.8 million tonne.
Source: Reliance Money Research /

Delay in Capex plans by global players

Companies Delay in capex plans
Alcoa & Alumina Indefinite delay in expansion of US$3 Billion worth of Wagerup
alumina refinery in Western Australia
Rio Tinto Delay in establishing US$ 11 Billion smelter in Saudi Arabia.

Source: Reliance Money Research

Outlook of Indian aluminium players vis-à-vis the global aluminium

Madras Aluminium Company Ltd, which
belongs to Vedanta Group, has
temporarily shut down its 40,000 tonne
of aluminium production.
scenario
Indian Aluminium players have not remained untouched by the current global scenario
that prevails in the aluminium sector. Hindalco, Nalco & Sterlite Industries are three
main players in Indian aluminium sector. Madras Aluminium Company Ltd, which
belongs to Vedanta Group, has temporarily shut down its 40,000 tonne of aluminium
production. MALCO's marginal cost to produce a tonne of aluminium is $1600/tonne,
which is above the current LME price at which aluminium is trading, making it difficult
for Malco to continue production. On the flip side Malco finds it profitable to sell the
power produced to the state grid.

The core players such as Hindalco and Nalco are producing at an average marginal
cost of $1450/tonne and $1500/tonne respectively. Both these companies are just
able to keep their neck above the water and do not anticipate any production-cuts in
near future as long as LME Aluminium is above $1500/tonne. Also, these companies
are going ahead with their capex plans for FY09E due to expectations of sustained
domestic demand. Going forward any further fall in aluminium price can be alarming
for Indian aluminium players also.

Production and Sales volume data of Indian players for H1 FY09E

Companies Alumina Aluminium
Production Sales Production Sales
Volumes-MT Volume-MT Volumes-MT Volume-MT
Nalco* 766400 426000 179324 175000
Hindalco 255199 268924
Sterlite Ind( Incl. Balco & Malco) 178211 172660
Note*: Nalco is only Indian player that is exporting Alumina.
Source: Reliance Money Research

Contd...
5
 13th January 2009

Indian aluminium players- Hindalco, Nalco & Sterlite have exhibited 98% as ratio of
sales to production for total Indian aluminium industry in H1 FY09E thus reflecting the
strong domestic demand. Total Indian industry's production has increased by 8%,
while sales volume has registered a jump of 12% as compared to pervious year of the
same half year.

Production and consumption scenario in Indian Aluminium Industry

1,300,000

1,200,000

1,100,000

tonne 1,000,000

900,000

800,000

700,000

600,000

500,000

E
98

99

00

01

02

03

04

05

06

07

08

09
19

19

20

20

20

20

20

20

20

20

20

20
P rod. Cons um p.

Source: Crisil/ Reliance Money Research

Indian Aluminium Industry is priced at
LME plus a small premium. Most of
players in this industry have an average
cost of production of approximately
$1500/tonne.
Indian aluminium production has marginally exceeded consumption till CY07, thus
reflecting sustained domestic demand. We expect a small surplus in the Indian
domestic production-consumption. Indian aluminium industry is highly consolidated
and it is a price taker- not a price marker. Indian Aluminium Industry is priced at LME
plus a small premium. Most of players in this industry have an average cost of
production of approximately $1500/tonne.

Sector wise Consumption Of Aluminium (2007)

40%
36%
35%

30% 29%

25%
22% 22%
20%

15%
15% 13%
11% 12%
10% 9% 8% 9%
6%
5% 4% 4%

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India World
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Source: Crisil/ Reliance Money Research

The India advantage

India has historically been a net exporter though in small quantities but is expected to
be net exporter of Aluminium from FY09E onwards with exports growing to as high as
1 mn tonne by FY2013 as the Aluminium supply is expected to exhibit a double digit
growth in coming years while the demand is expected to grow at higher single digit.
Contd...

6
 13th January 2009

Aluminium Metal Balance for India

Capacity (kT) 2006-07 2007-08E 2008-09P 2009-10P 2010-11P 2011-12P 2012-13P
Nalco 345 357 370 460 470 470 585
Malco 40 40 40 40 40 40 40
Balco 345 350 600 850 850 850 850
Vedanta Aluminium - - - 250 500 500 500
Hindalco 461 471 539 539 539 864 1223
Total Capacity 1191 1218 1549 2139 2399 2724 3198
Total Production 1150.07 1234.54 1421.10 1833.00 2174.00 2511.50 2953.50
Total Demand 1118.73 1261.41 1374.9 1498.68 1633.56 1780.57 1940.83
Net Exportable surplus 31.35 (26.86) 46.18 334.33 540.44 730.9 1012.67
Source: Crisil/ Reliance Money Research

Indian aluminium producers are amongst the lowest cost producers of the metal in the
world, which is a significant advantage, especially during times of cyclical downturns.
Indian aluminium producers are
Abundant bauxite reserves and access to cheap labour have given the domestic
amongst the lowest cost producers of
aluminium manufacturers an edge over their international peers.
the metal in the world, which is a
significant advantage, especially during
Despite the current slowdown faced globally and corrected LME prices, Indian
times of cyclical downturns.
Aluminium Majors are sticking to their current expansion plans. As per the current
capex plans, the Aluminium production capacity of India will double to 2.7 mn tonne
per annum by FY12E and 3.2 mn tonne by FY13E.

Future Outlook of Aluminium Industry

LME Aluminium prices are a function of the International demand and supply. We
expect North America, Europe, Asia (less China),Australia, Africa, East Europe and
Japan to exhibit a flat growth rate while China, CIS and Middle East countries to show
a drop in growth rate of Aluminium consumption. The overall Aluminium demand is
expected to rise by just 2.6% for CY09E as against 3.9% growth for CY08E and 7.4%
growth for CY07.
The overall Aluminium demand is
The current Aluminium prices are below the cost of production of almost 70% of the
expected to rise by just 2.6% for CY09E
producers in the world. The process of production cuts has already started as the
as against 3.9% growth for CY08E and
selling price is quoting below the cost of production. Chinese production and supply
7.4% growth for CY07.
of Aluminium has an extended effect on the Global demand –supply equation. As on
the day China is on way to reduce about 26% of its production capacity which is
equivalent to 4 mn tonne. This production cut falls short by just 0.6 mn tonne of the
expected metal surplus in CY09 (calculated above before accounting for the supply
cuts), which would then be negated due to this supply cut from China only. This capacity
shut down may resume production if the LME Aluminium prices quote in the vicinity of
$2000/tonne. Hence, the net surplus is expected at the exchanges that will keep the
LME prices subdued for the CY09.

China Aluminium Capacity Reduction

Smelters Curr. Capacity Reduction in Capacity Operating
(mn tonne) (mn tonne) Ratio
Central China 4.37 1.4 32.0%
North West China 2.89 0.41 14.2%
East China 2.65 0.56 21.1%
North China 2.5 0.69 27.6%
South West China 2.26 0.78 34.5%
South China 0.58 0.11 19.0%
North East China 0.18 0.1 55.6%
Total 15.43 4.05 26.2%
Source:Reliance Money Research

Contd...
7
 13th January 2009

A survey of 35 Aluminium plate producers showed that the operating ratio of these
producers has been dropping for last three months.

Survey of 35 Aluminium plate producers in China

Capacity (mn tonne) No. of Total capacity Oct Avg Nov. Avg. Dec. Avg
manufactures (mn tonne) Operating Ratio Operating Ratio Operating Ratio
> 0.1 mn tonne 12 2.17 65.61% 62.70% 54.70%
0.03-.01 mn tonne 16 0.75 58.50% 51.30% 42.10%
< 0.03 mn tonne 7 0.061 77.25% 72.30% 64.80%
35 2.981 64.02% 60.00% 51.70%

Declining Operating ratio for Chinese plate producers - for Oct-Dec 09 qtr

90.00%

80.00%

70.00%

60.00%
Operating Ratio (%)

The final conclusion is that LME

50.00%
Aluminium prices are expected to be in
the range of $1700-$1900 per tonne. 40.00%

30.00%

20.00%

10.00%

0.00%
Oct Avg O/R Nov. Avg. O/R Dec. Avg O/R

> 0.1 mn tonne 0.03-.01 mn tonne < 0.03 mn tonne Overall

Source: Crisil/ Reliance Money Research

The above graph and the table indicates that the operating ratio has come down all
the way from 64% in Oct.’08 to 52% in Dec.’08 for the 3 mn tonne of capacity of China
surveyed. The scenario is similar for rest of the producers too.

The final conclusion is that LME Aluminium prices are expected to be in the range of
$1700-$1900 per tonne.

Contd...
8
 13th January 2009

Nalco
HOLD
Low cost producer
Price: Rs.181
Nalco locates itself among the first quartile on the cost curve for Aluminium
12M Target Price: Rs.191 production across the globe which puts it at advantage against its global peers
% Upside / (Downside) 5.8% who are resorting to production cuts at current LME Aluminium price of $1550/
tonne. The company produces and sells both Alumina and Primary metal. It owns
captive bauxite mines and power plant with dedicated coal supplies. The company
had some issues with the supply of thermal coal from Mahanadi Coal fields and
Stock details
hence had to procure imported coal at higher prices. The issues regarding the
BSE Code 532234
supply of coal has been sorted out, thus relieving it of higher power costs which is
NSE Code NATIONALUM a major cost for the Aluminium producers. The crude oil prices have also come
Reuters Code NALU.BO down which has reduced the cost of calcined petro-coke and coal tar pitch- by
Bloomberg Code NACL IN
products of crude oil. These were important contributors for hike in production
Market Cap (Rs bn) 1191.007 cost for last 2 quarters for Nalco. Henceforth, Nalco will continue with its advantage
Free Float (%) 12.85 of being a low cost Aluminium producer thus weathering the cyclical downturns.
52-wk Hi/Lo (Rs) 565.9/108.35
Avg Daily Vol (BSE) 164279 Expanding capacity:
Avg Daily Vol (NSE) 555937 Nalco had embarked on massive expansion plan taking the capacity of Alumina
Shares o/s (mn) FV Rs 10 644.3
refinery to 2.1 mn tonne (an increment of 0.525 mn tonne) and Aluminium Smelting
Source:Reliance Money Research
of 0.46 mn tonne (an increase of 0.12 mn tonne) in its 2nd phase of expansion
which is expected to be completed in Dec.’08 at an expenditure of Rs 40 bn. With
enhanced capacity Nalco would be in position to cash on the rising domestic
demand. The company is moving forward with other domestic expansions viz.
third phase at an expense of Rs 60 bn taking the refinery capacity to 3 mn tonne
and smelting capacity to 0.58 mn tonne by Dec. 2011, 1.4 mn tonne refinery
Shareholding pattern (31st Dec 2008) complex at Vizag at capex of Rs 70 bn, 0.5 mn tonne smelting capacity at
Jharsuguda at expense of Rs 85 bn along with 1260 MW power plant. Nalco has
Financial also undertaken 2 overseas projects viz. 0.5 mn tpa Smelter with 1250 MW power
Institutions 5% FII 4% plant at Indonesia at the cost of Rs 140 bn and 0.33 mn tpa Smelter in Iran at
Public 3% expense of Rs 80 bn.

Long term domestic demand to remain bouyant

The consumption pattern of Aluminium in India is different. The largest contributor
to Aluminium consumption is Power sector which is expected to feel relatively
Promoters 88%
less heat following the global meltdown as the sector is marked by government
spending. Although, the construction and automobile sector is currently reeling
Source:Reliance Money Research
under slowdown, the former is expected to show revival following the fiscal and
monetary steps taken by the Authorities.

Recommend a Hold:
Nalco is expected to register a top line of Rs 50.9 bn and Rs 58.1 bn for FY09E
and FY10E and an EPS of Rs 20.5 & Rs 21.3 for FY09E and FY10E respectively.
The company is cash rich and can tide over the current fall in LME Aluminium
prices. At CMP of Rs 181/share, the stock is trading at 8.5x FY10E earnings. We
recommend a hold with a price target of Rs 191 (5.8% upside) at which the stock
will quote at 9.35x FY10E earnings.

Financials Summary Rs. Mn

Stock Performance (Rel to sensex) Y/E March FY07 FY08 FY09E FY10E
Revenues 59,556 50,220 50,986 58,129
25000 600
Rev. Growth (%) 22.68% -15.68% 1.53% 14.01%
500
EBIDTA 35,800 22,520 19,761 22,954
20000
EBIDTA margins (%) 60.11% 44.84% 38.76% 39.49%
BSE 400 Net Profit 23,680 16,215 13,195 13,703
15000
EPS (Rs.) 36.75 25.17 20.48 21.27
300
CEPS (Rs.) 41.88 29.68 25.41 29.17
10000
200 EV/EBIDTA (x) 2.23 3.57 4.76 4.87
5000
EV/Sales (x) 1.34 1.60 1.84 1.92
100
RoE (%) 33.49% 19.05% 13.84% 13.14%
0
NALCO 0 RoCE (%) 33.49% 19.05% 13.84% 13.14%
Oct-07 Nov-07 Jan-08 Feb-08 Apr-08 May-08 Jul-08 Aug-08 Oct-08 Nov-08 Jan-09
P/E (x) @ Rs 181 4.9 7.2 8.8 8.5
P/CEPS (x) @ Rs.181 4.3 6.1 7.1 6.2
Source: Capitaline
Source: Company / Reliance Money Research
Contd...
9
 13th January 2009

Profit & loss statement (Rs mn) Balance sheet (Rs mn)
YYear to Mar FY07 FY08 FY09E FY10E YYear to Mar FY07 FY08 FY09E FY10E

Net Sales 59,556 50,220 50,986 58,129 Equity Cap 6443 6443 6443 6443

% Growth 22.7% -15.7% 1.5% 14.0% Reserves 70509 82301 90973 100153

EBIDTA 35,800 22,520 19,761 22,954 Net worth 76952 88745 97416 106596

% Growth 38.6% -37.1% -12.3% 16.2% Total Loans 0 0 0 0

Interest 459 621 5 0 Deferred Tax Liability 6127 6074 5137 5789

Depreciation 3171 2811 3177 5089 Total Liability 6127 6074 5137 5789

PBT 36204 24666 20138 20762 Net Block 37121 35318 49463 81198

% Growth 49.0% -31.9% -18.4% 3.1% Investments 0 1150 2150 3150

Tax 12390 8351 6943 7059 Inventory 6350 6867 8037 9229

PAT 23814 16315 13195 13703 Debtors 341 607 764 873
% Growth 52.4% -31.5% -19.1% 3.9% Cash Balance 36865 35165 20452 1776
Dividend (%) 75% 60% 60% 60% Total Current Liabilities 12186 15409 16793 19397
EPS (Rs) 37.0 25.3 20.5 21.3 NCA 37555 35005 18368 -1042
BVPS (Rs.) 119.4 137.7 151.2 165.4 Total Assets 83080 94819 102553 112385

Ratio Analysis Cash Flow Statement (Rs mn)

YYear to Mar FY07 FY08 FY09E FY10E Year to Mar FY07 FY08 FY09E FY10E
OPM (%) 60.1% 44.8% 38.8% 39.5% PAT 23814 16315 13195 13703
NPM (%) 39.76% 32.29% 25.88% 23.57% Depreciation 3171 2811 3177 5089
RoE (%) 33.5% 19.1% 13.8% 13.1% Change in WC 951 850 1924 734
RoCE (%) 33.5% 19.1% 13.8% 13.1% Operating CF 27936 19976 18296 19526
D/E (x) 0.00 0.00 0.00 0.00 Capex -6823 -17121 -27414 -34331
Asset Turnover (x) 1.27 0.90 0.70 0.60 Misc. Exp -107 20 -133 0
Debtors' days 2 4 5 5 Investing CF -6930 -17100 -27547 -34331
Creditors days 243 394 390 390 Equity -230 0 0 0
Inventory Days 117 113 118 118 Deferred Tax Liability -290 -53 -938 652
Valuation Ratios Dividends -5558 -4523 -4523 -4523
P/ CEPS (x) 4.4 6.2 7.3 6.3 Debt 0 0 0 0
EV/ EBIDTA (x) 2.3 3.7 4.9 5.0 Financing CF -6078 -4576 -5461 -3871
Mkt Cap/ Sales (x) 2.0 2.4 2.3 2.1 Net Change 14928 -1701 -14713 -18676
CEPS (Rs.) 41.9 29.7 25.4 29.2 Opening Cash 21937 36865 35165 20452
P/ BV (x) 1.5 1.3 1.2 1.1 Closing Cash 36865 35165 20452 1776
Source: Reliance Money Research

H109 Performance
(Rs Mn) H109 H108 % Change (YoY)
Sales Volume (tonne) 175000 171776 1.9%
Revenue 30,390 24,734 22.9%
EBIDTA 14,127 9,091 55.4%
EBIDTA Margin (%) 46.5% 36.8% 9.7%
Interest 5 7 -35.2%
Depreciation 1,375 1,375 -
PBT 14,840 13,421 10.6%
Tax 5,142 4557 12.8%
PAT 9,698 8,864 9.4%
NPM (%) 31.9% 35.8% -3.9%
Adjusted EPS 15.1 13.8
Source: Reliance Money Research

10
 13th January 2009

Hindalco

Highly leveraged Balance sheet:

Price: Rs.50 Hindalco’s acquisition of Canadian Aluminium major Novelis in May ’07 for the
purchase consideration of $6.1 bn (including the $2.4 bn debt of Novelis) has left
the former high and dry. The acquisition was made when both the economy and
the metal cycle were riding upwards. In the current scenario, when the Aluminium
Stock details prices have come all the way down to $1500/tonne which is marginally above the
BSE Code 500440 cost of production and the demand dropped, the loss making acquisition is a drag
NSE Code HINDALCO on the financial statements.
Reuters Code HALC.BO
Bloomberg Code HNDL.IN
Market Cap (Rs bn) 894.568
Novelis’ turning into profit making venture has been deferred
Free Float (%) 64.81 by a year:
52-wk Hi/Lo (Rs) 210.4/38.05 It was expected that Novelis will make profit from FY10E after the metal prices
Avg Daily Vol (BSE) 2837013 ceiling contracts are expired but the current base metal meltdown following the
Avg Daily Vol (NSE) 6924902
financial mess has pushed the probable turnaround of the company by more than
Shares o/s (mn) FV Rs 1 1705
a year. We expect Novelis to turnaround not before FY13E. Till that time, the
Source:Reliance Money Research
Canadian company will be a drag over the consolidated balance sheet, although
it may reduce with passage of time. Novelis derives 46% of its revenues from
beverage industry mainly located in American and European Continent, 18% from
construction and Industrial segment, 17% from foils and packaging and 9% from
transport. With these areas under deep recession the demand for the product is
Shareholding pattern (30th Sept 2008) expected to fall drastically.

Hindalco Standalone to benefit from falling Copper prices but loose due to crashing
Promoters 35%
Financial
FII 15% Aluminium prices: Hindalco- being a standalone smelter will benefit in future due
Institutions 17% to rising treatment and refining charges ( due to fall in mined copper concentrate)
but will be affected due to fall in the Aluminium prices as Aluminium had contributed
80% of Standalone profit for FY08.
Public 33%

Hindalco (St.) is expected to report a Sales of Rs 175.4 bn (a YoY decline of 11%)

Source:Reliance Money Research
and Rs 140.3 bn (a cut of 20% (YoY)) for FY09E and FY10E and an EPS of Rs
12.4 and Rs 11.56 respectively for FY09E and FY10E. At the CMP of Rs 50, the
Standalone entity is quoting at 4.3x FY10E earnings. The picture is a bit hazy
about the performance of Novelis and Aditya Birla Minerals Ltd. Hence, we currently
refrain ourselves from giving any recommendation on the stock and will come
with a review and the price target post the Q309 results for these subsidiaries.
The following numbers are for the Standalone entity.

Financials Summary Rs. Mn

Y/E March FY07 FY08 FY09E FY10E
Stock Performance (Rel to sensex) Revenues 186,831 196,940 175,411 140,306
Rev. Growth (%) 60.50% 5.41% -10.93% -20.01%
EBIDTA 40,150 34,011 30,378 28,516
25000 BSE 250
EBIDTA margins (%) 54.12% -15.29% -10.68% -6.13%
20000 200 Net Profit 25,643 28,609 21,202 19,710
EPS (Rs.) 24.58 27.42 12.44 11.56
15000 150 CEPS (Rs.) 30.70 33.06 16.21 15.50
EV/EBIDTA (x) 2.28 3.94 4.41 4.70
10000 100
EV/Sales (x) 0.49 0.68 0.76 0.95
Hindalco
5000 50 RoE (%) 23.08% 19.09% 10.16% 7.78%
RoCE (%) 15.90% 13.69% 7.75% 6.24%
0 0
Oct-07 Nov-07 Jan-08 Feb-08 Apr-08 May-08 Jul-08 Aug-08 Oct-08 Nov-08 Jan-09
P/E (x) @ Rs 50 2.0 1.8 4.0 4.3
P/CEPS (x) @ Rs.50 1.6 1.5 3.1 3.2
Source: Capitaline
Source: Company / Reliance Money Research

Contd...
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 13th January 2009

Profit & loss statement (Rs mn) Balance sheet (Rs mn)
YYear to Mar FY07 FY08 FY09E FY10E YYear to Mar FY07 FY08 FY09E FY10E

Total Sales 186,831 196,940 175,411 140,306 Equity Cap 1043 1231 1705 1705

Reserves 123137 171737 241671 260247

% Growth 60.5% 5.4% -10.9% -20.0%
Net worth 124180 172967 243376 261952
EBIDTA 40,150 34,011 30,378 28,516
Total Loans 73686 83286 88286 88786
EBIDTA margins 21.9% 17.7% 18.1% 21.4%
Deferred Tax Liability 11258 13237 12017 12724
Interest 2424 2806 3364 3108 Total Liability 209124 269490 343678 363462

Depreciation 6380 5878 6434 6726 Net Block 70067 78093 95781 120622

PBT 35046 30256 27820 25934 Investments 86753 141080 142080 143080

Inventory 43153 50979 45932 34640

% Growth 66.4% -13.7% -8.1% -6.8%
Debtors 15045 15650 16126 14581
Tax 9403 1647 6617 6224
Cash Balance 6655 1470 66928 63406
PAT 25643 28609 21202 19710
Total Current Liabilities 40275 39399 44825 36946
% Growth 54.9% 11.6% -25.9% -7.0%
NCA 37508 39118 95302 87036
Dividend (%) 170% 184% 62% 58% Total Assets 209124 269490 343678 363462

Ratio Analysis Cash Flow Statement (Rs mn)

YYear to Mar FY07 FY08 FY09E FY10E Year to Mar FY07 FY08 FY09E FY10E
OPM (%) 21.9% 17.7% 18.1% 21.4% PAT 25643 28609 21202 19710
NPM (%) 13.73% 14.53% 12.09% 14.05% Depreciation 6380 5878 6434 6726
RoE (%) 23.1% 19.1% 10.2% 7.8% Change in WC 1474 -6795 9273 4744
RoCE (%) 15.9% 13.7% 7.8% 6.2%
Operating CF 33498 27693 36910 31180
Int. Coverage (x) 16.56 12.12 9.03 9.18
Capex -61791 -64288 -24438 -34776
D/E (x) 0.59 0.48 0.36 0.34
Misc. Exp -275 -346 0 0
Asset Turnover (x) 1.62 1.50 1.18 0.84
Investing CF -62066 -64634 -24438 -34776
Creditors' days 79 62 90 90
Equity 4497 22832 50426 0
Debtors' days 30 30 35 40
Inventory Days 116 124 143 153 Others -1076 1979 -1220 708

Valuation Ratios Dividends -2022 -2655 -1219 -1134

P/ CEPS (x) 1.7 1.6 3.3 3.4 Debt 24652 9600 5000 500

EV/ EBIDTA (x) 2.4 4.0 4.5 4.8 Financing CF 26051 31756 52986 74
Mkt Cap/ Sales (x) 0.3 0.3 0.5 0.6 Net Change -2518 -5185 65458 -3522
CEPS (Rs.) 30.7 33.1 16.2 15.5 Opening Cash 9173 6655 1470 66928
P/ BV (x) 0.4 0.3 0.4 0.3 Closing Cash 6655 1470 66928 63406
* Adjusted for bonus and split. Source: Reliance Money Research

H109 Performance
(Rs Mn) H109 H108 % Change (YoY)
Sales Volume (tonne) 268924 226433 18.8%
Revenue 103,307 96,376 7.2%
EBIDTA 19,424 18,060 7.6%
EBIDTA Margin (%) 18.8% 18.7% 0.1%
Interest 1,616 1,194 35.4%
Depreciation 3,160 2,874 9.9%
PBT 18,563 16,336 13.6%
Tax 4,396 3,879 13.3%
PAT 14,167 12,457 13.7%
NPM (%) 13.7% 12.9% 0.8%
Adjusted EPS 11.6 19.3 -
Source: Reliance Money Research

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 13th January 2009

Reliance Money Stock Rating

Rating Stock Performance
BUY Appreciate more than 15% in next 12 months
HOLD Appreciate upto 15% in next 12 months
REDUCE Depreciate upto 10% in next 12 months
SELL Depreciate More than 10% in next 12 months

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Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025
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DISCLAIMER: This document has been prepared by Reliance Money Limited, Mumbai and is to be used by the recipient and not to be circulated. The information
provided should not be reproduced, distributed or published, in whole or in part without prior permission from the company. The information and the opinions
contained in the document have been compiled from source believed to be reliable. The company does not warrant its accuracy, completeness and correctness.
This document is not and should not be construed as an offer to sell or solicitation to buy any securities.

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