Aluminium Sector Update - Rel Money - 13 01 09

Sec at e Secttor Upd Updat ate 13th Januar y 2009 anuary Pankaj Bobade [email protected] Tel.: +91-22-30443319

Aluminium Sector

Poonam Bisht [email protected] 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. 9%

10%

4%

12% 28% 15% 22%

Construction,

Transport

and

Transport

Construction

Pack aging

Engineering

Consumer durables

Others

Electrical

Source: Reliance Money Research

Packaging industry accounts for about 65% of industry wise consumption of

Construction, Transport and Packaging industry accounts for about 65% of industry

Aluminium while Europe, N. America

wise consumption of Aluminium while Europe, N. America and China contribute 71%

and China contribute 71% of the

of the annual consumption. The three sectors and three geographical areas are the

annual consumption.

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 $2,100

($/tonne)

(Tonne)

2,000,000 1,800,000

$1,600 1,600,000 $1,100

1,400,000

$600

1,200,000 1,000,000 -Ja 02

The price of alumina has drastically

Dec '08.

12

8 -0 ar -M

8 8 8 8 8 8 8 08 -0 -0 -0 -0 l-0 r-0 vt-0 ay ep ug ec -Ju Ap No Oc S A D M 1 0 18 19 15 10 05 29 27 Inventory Aluminium Price

Source: LME/Reliance Money Research

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

($/Tonne)

in July '08 to as low as $ 225/tonne in

06

8 -0 eb -F

300 250 200 150 100 50 0

2Ja n08 2Fe b08 2M ar -0 8 2Ap r-0 8 2M ay -0 8 2Ju n08 2Ju l- 0 8 2Au g08 2Se p08 2O ct -0 8 2No v08 2De c08

fallen from all time high of $ 435/tonne

$100

08 n-

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%

30.0% 20.0% 10.0%

-40.0%

2007 Y oY gr.(% )

Japan

China

CIS

East Europe

Africa

Middle East

Australia

2008 Y oY gr.(% )

Global demand

-30.0%

Asia (less China, Japan)

-20.0%

S America

-10.0%

W Europe

0.0% N America

Expected (%) growth (YoY)

40.0%

2009 Y oY gr.(% )

Source: Reliance Money Research

Automobile and construction industries along with packaging industry which account for 65% of the total Aluminium consumption, are experiencing recession due to the global economy slowdown.

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

CRU Aluminium Cash Cost Curve

Source: Reliance Money Research Contd...

3

13th January 2009

It is expected that inventory level will rise from 0.32 Mn tonne in CY07 to 4.6 Mn tonne in CY09E.

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

('000 tonne)

4000

3000 2501 2000

1000 -524

324

2006

2007

0 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 The total global aluminium productioncuts, 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.

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 productioncuts 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% 1% 0%

2%

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 Alcoa & Alumina Rio Tinto

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

Source: Reliance Money Research

Outlook of Indian aluminium players vis-à-vis the global aluminium scenario Indian Aluminium players have not remained untouched by the current global scenario Madras Aluminium Company Ltd, which

that prevails in the aluminium sector. Hindalco, Nalco & Sterlite Industries are three

belongs to Vedanta Group, has

main players in Indian aluminium sector. Madras Aluminium Company Ltd, which

temporarily shut down its 40,000 tonne

belongs to Vedanta Group, has temporarily shut down its 40,000 tonne of aluminium

of aluminium production.

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

Nalco* Hindalco Sterlite Ind( Incl. Balco & Malco)

Alumina Production Sales Volumes-MT Volume-MT 766400 426000

Aluminium Production Sales Volumes-MT Volume-MT 179324 175000 255199 268924 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

P rod.

09

08

E

E 20

07

20

20

06 20

05 20

04

03

20

20

02 20

01

00

20

20

99 19

19

98

500,000

Cons um p.

Source: Crisil/ Reliance Money Research

Sector wise Consumption Of Aluminium (2007) 40% 36% 35% 30% 25%

29% 22%

22%

20% 15%

13%

15% 12%

11%

9%

10%

8%

9%

6%

4%

5%

4%

World

th er s O

C on .D ur ab le s

India

En gi ne er in g

El ec tri ca l

Pa ck ag in g

C

on st ru ct io ns

0% Tr an sp or ts

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.

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) Nalco Malco Balco Vedanta Aluminium Hindalco Total Capacity Total Production Total Demand Net Exportable surplus

2006-07 345 40 345 461 1191 1150.07 1118.73 31.35

2007-08E 357 40 350 471 1218 1234.54 1261.41 (26.86)

2008-09P 370 40 600 539 1549 1421.10 1374.9 46.18

2009-10P 460 40 850 250 539 2139 1833.00 1498.68 334.33

2010-11P 470 40 850 500 539 2399 2174.00 1633.56 540.44

2011-12P 470 40 850 500 864 2724 2511.50 1780.57 730.9

2012-13P 585 40 850 500 1223 3198 2953.50 1940.83 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 amongst the lowest cost producers of the metal in the world, which is a significant advantage, especially during times of cyclical downturns. Abundant bauxite reserves and access to cheap labour have given the domestic aluminium manufacturers an edge over their international peers. Despite the current slowdown faced globally and corrected LME prices, Indian 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 expected to rise by just 2.6% for CY09E as against 3.9% growth for CY08E and 7.4% growth for CY07.

The current Aluminium prices are below the cost of production of almost 70% of the producers in the world. The process of production cuts has already started as the selling price is quoting below the cost of production. Chinese production and supply 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 Total

0.18

0.1

55.6%

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%

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

Operating Ratio (%)

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Oct Avg O/R > 0.1 mn tonne

Nov. Avg. O/R 0.03-.01 mn tonne

< 0.03 mn tonne

Dec. Avg O/R 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

12M Target Price:

Rs.191

% Upside / (Downside)

5.8%

Stock details BSE Code

532234

NSE Code

NATIONALUM

Reuters Code

NALU.BO

Bloomberg Code

NACL IN

Market Cap (Rs bn)

1191.007

Free Float (%)

12.85

52-wk Hi/Lo (Rs)

565.9/108.35

Avg Daily Vol (BSE)

164279

Avg Daily Vol (NSE)

555937

Shares o/s (mn) FV Rs 10

644.3

Source:Reliance Money Research

Shareholding pattern (31st Dec 2008) Financial Institutions 5%

FII 4%

Public 3%

Nalco locates itself among the first quartile on the cost curve for Aluminium production across the globe which puts it at advantage against its global peers 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 hence had to procure imported coal at higher prices. The issues regarding the supply of coal has been sorted out, thus relieving it of higher power costs which is a major cost for the Aluminium producers. The crude oil prices have also come down which has reduced the cost of calcined petro-coke and coal tar pitch- by products of crude oil. These were important contributors for hike in production cost for last 2 quarters for Nalco. Henceforth, Nalco will continue with its advantage of being a low cost Aluminium producer thus weathering the cyclical downturns.

Expanding capacity: Nalco had embarked on massive expansion plan taking the capacity of Alumina refinery to 2.1 mn tonne (an increment of 0.525 mn tonne) and Aluminium Smelting 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 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 also undertaken 2 overseas projects viz. 0.5 mn tpa Smelter with 1250 MW power plant at Indonesia at the cost of Rs 140 bn and 0.33 mn tpa Smelter in Iran at expense of Rs 80 bn.

Long term domestic demand to remain bouyant Promoters 88% Source:Reliance Money Research

The consumption pattern of Aluminium in India is different. The largest contributor to Aluminium consumption is Power sector which is expected to feel relatively less heat following the global meltdown as the sector is marked by government spending. Although, the construction and automobile sector is currently reeling 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 Y/E March

Stock Performance (Rel to sensex) 600

25000

500

20000

BSE

400

15000 300 10000 200 5000

0

100

NALCO

0 Oct-07 Nov-07 Jan-08 Feb-08 Apr-08 May-08 Jul-08 Aug-08 Oct-08 Nov-08 Jan-09

Source: Capitaline

Revenues Rev. Growth (%) EBIDTA EBIDTA margins (%) Net Profit EPS (Rs.) CEPS (Rs.) EV/EBIDTA (x) EV/Sales (x) RoE (%) RoCE (%) P/E (x) @ Rs 181 P/CEPS (x) @ Rs.181

Rs. Mn FY07

FY08

FY09E

FY10E

59,556 22.68% 35,800 60.11% 23,680 36.75 41.88 2.23 1.34 33.49% 33.49% 4.9 4.3

50,220 -15.68% 22,520 44.84% 16,215 25.17 29.68 3.57 1.60 19.05% 19.05% 7.2 6.1

50,986 1.53% 19,761 38.76% 13,195 20.48 25.41 4.76 1.84 13.84% 13.84% 8.8 7.1

58,129 14.01% 22,954 39.49% 13,703 21.27 29.17 4.87 1.92 13.14% 13.14% 8.5 6.2

Source: Company / Reliance Money Research

Contd...

9

13th January 2009

Profit & loss statement (Rs mn) YYear to Mar

Balance sheet (Rs mn)

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

459

621

5

0

Deferred Tax Liability

6127

6074

5137

5789

3171

2811

3177

5089

Total Liability

6127

6074

5137

5789

PBT

36204

24666

20138

20762

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

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

119.4

137.7

151.2

165.4

Total Assets

83080

94819

102553

112385

Interest Depreciation

BVPS (Rs.)

Ratio Analysis YYear to Mar

Net Block

Debtors

Cash Flow Statement (Rs mn) FY07

FY08

FY09E

FY10E

OPM (%)

60.1%

44.8%

38.8%

39.5%

NPM (%)

39.76%

32.29%

25.88%

23.57%

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

-6823

-17121

-27414

-34331

-107

20

-133

0

Year to Mar

FY07

FY08

FY09E

FY10E

PAT

23814

16315

13195

13703

3171

2811

3177

5089

Depreciation

D/E (x)

0.00

0.00

0.00

0.00

Capex

Asset Turnover (x)

1.27

0.90

0.70

0.60

Misc. Exp

2

4

5

5

-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

-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

41.9

29.7

25.4

29.2

Opening Cash

21937

36865

35165

20452

1.5

1.3

1.2

1.1

Closing Cash

36865

35165

20452

1776

Debtors' days

Valuation Ratios

CEPS (Rs.)

Investing CF

Dividends

P/ BV (x)

Source: Reliance Money Research

H109 Performance (Rs Mn) Sales Volume (tonne) Revenue EBIDTA EBIDTA Margin (%) Interest Depreciation PBT Tax PAT NPM (%) Adjusted EPS

H109

H108

175000 30,390 14,127 46.5% 5 1,375 14,840 5,142 9,698 31.9% 15.1

171776 24,734 9,091 36.8% 7 1,375 13,421 4557 8,864 35.8% 13.8

% Change (YoY) 1.9% 22.9% 55.4% 9.7% -35.2% 10.6% 12.8% 9.4% -3.9%

Source: Reliance Money Research

10

13th January 2009

Hindalco Highly leveraged Balance sheet: Price:

Rs.50

Stock details BSE Code

500440

NSE Code

HINDALCO

Reuters Code

HALC.BO

Bloomberg Code

HNDL.IN

Market Cap (Rs bn)

894.568

Free Float (%)

64.81

52-wk Hi/Lo (Rs)

210.4/38.05

Avg Daily Vol (BSE)

2837013

Avg Daily Vol (NSE)

6924902

Shares o/s (mn) FV Rs 1

1705

Source:Reliance Money Research

Shareholding pattern (30th Sept 2008)

Financial Institutions 17%

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 prices have come all the way down to $1500/tonne which is marginally above the cost of production and the demand dropped, the loss making acquisition is a drag on the financial statements.

Promoters 35%

FII 15%

Novelis’ turning into profit making venture has been deferred by a year: It was expected that Novelis will make profit from FY10E after the metal prices ceiling contracts are expired but the current base metal meltdown following the financial mess has pushed the probable turnaround of the company by more than a year. We expect Novelis to turnaround not before FY13E. Till that time, the 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 expected to fall drastically. Hindalco Standalone to benefit from falling Copper prices but loose due to crashing Aluminium prices: Hindalco- being a standalone smelter will benefit in future due 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%) 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.

Source:Reliance Money Research

Financials Summary Y/E March

Stock Performance (Rel to sensex) BSE

25000

250

20000

200

15000

150

10000

100

Hindalco

5000 0

50

0 Oct-07 Nov-07 Jan-08 Feb-08 Apr-08 May-08 Jul-08 Aug-08 Oct-08 Nov-08 Jan-09

Source: Capitaline

Revenues Rev. Growth (%) EBIDTA EBIDTA margins (%) Net Profit EPS (Rs.) CEPS (Rs.) EV/EBIDTA (x) EV/Sales (x) RoE (%) RoCE (%) P/E (x) @ Rs 50 P/CEPS (x) @ Rs.50

Rs. Mn FY07

FY08

FY09E

FY10E

186,831 60.50% 40,150 54.12% 25,643 24.58 30.70 2.28 0.49 23.08% 15.90% 2.0 1.6

196,940 5.41% 34,011 -15.29% 28,609 27.42 33.06 3.94 0.68 19.09% 13.69% 1.8 1.5

175,411 -10.93% 30,378 -10.68% 21,202 12.44 16.21 4.41 0.76 10.16% 7.75% 4.0 3.1

140,306 -20.01% 28,516 -6.13% 19,710 11.56 15.50 4.70 0.95 7.78% 6.24% 4.3 3.2

Source: Company / Reliance Money Research

Contd...

11

13th January 2009

Profit & loss statement (Rs mn) YYear to Mar Total Sales

FY07

FY08

Balance sheet (Rs mn) FY09E

FY10E

YYear to Mar

FY07

FY08

FY09E

FY10E

Equity Cap

1043

1231

1705

1705

Reserves

123137

171737

241671

260247

Net worth

124180

172967

243376

261952

Total Loans

73686

83286

88286

88786

Deferred Tax Liability

11258

13237

12017

12724

209124

269490

343678

363462

186,831

196,940

175,411

140,306

% Growth

60.5%

5.4%

-10.9%

-20.0%

EBIDTA

40,150

34,011

30,378

28,516

EBIDTA margins

21.9%

17.7%

18.1%

21.4%

Interest

2424

2806

3364

3108

Total Liability

Depreciation

6380

5878

6434

6726

Net Block

70067

78093

95781

120622

PBT

35046

30256

27820

25934

Investments

86753

141080

142080

143080

% Growth

66.4%

-13.7%

-8.1%

-6.8%

Inventory

43153

50979

45932

34640

Tax

9403

1647

6617

6224

Debtors

15045

15650

16126

14581

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

170%

184%

62%

58%

209124

269490

343678

363462

Cash Balance

Dividend (%)

Total Assets

Ratio Analysis YYear to Mar

Cash Flow Statement (Rs mn) FY07

FY08

FY09E

FY10E

OPM (%)

21.9%

17.7%

18.1%

21.4%

NPM (%)

13.73%

14.53%

12.09%

14.05%

RoE (%)

23.1%

19.1%

10.2%

7.8%

RoCE (%)

15.9%

13.7%

7.8%

6.2%

16.56

12.12

9.03

9.18

D/E (x)

0.59

0.48

0.36

0.34

Asset Turnover (x)

1.62

1.50

1.18

0.84

Creditors' days

79

62

90

90

Debtors' days

30

30

35

40

Int. Coverage (x)

Inventory Days

116

124

143

1.7

1.6

3.3

FY07

FY08

FY09E

FY10E

PAT

25643

28609

21202

19710

Depreciation

6380

5878

6434

6726

Change in WC

1474

-6795

9273

4744

33498

27693

36910

31180

-61791

-64288

-24438

-34776

-275

-346

0

0

-62066

-64634

-24438

-34776

Equity

4497

22832

50426

0

Others

-1076

1979

-1220

708

Dividends

-2022

-2655

-1219

-1134

3.4

Debt

24652

9600

5000

500

153

Valuation Ratios P/ CEPS (x)

Year to Mar

Operating CF Capex Misc. Exp Investing CF

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

30.7

33.1

16.2

15.5

Opening Cash

9173

6655

1470

66928

0.4

0.3

0.4

0.3

Closing Cash

6655

1470

66928

63406

CEPS (Rs.) P/ BV (x)

* Adjusted for bonus and split. Source: Reliance Money Research

H109 Performance (Rs Mn) Sales Volume (tonne) Revenue EBIDTA EBIDTA Margin (%) Interest Depreciation PBT Tax PAT NPM (%) Adjusted EPS

H109

H108

% Change (YoY)

268924 103,307 19,424 18.8% 1,616 3,160 18,563 4,396 14,167 13.7% 11.6

226433 96,376 18,060 18.7% 1,194 2,874 16,336 3,879 12,457 12.9% 19.3

18.8% 7.2% 7.6% 0.1% 35.4% 9.9% 13.6% 13.3% 13.7% 0.8% -

Source: Reliance Money Research

12

13th January 2009

Reliance Money Stock Rating Rating BUY

Stock Performance 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

Reliance Money: Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg, Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025 Tel.: 91-22-30443301, Fax No.: 30443306 Equities: Trading through Reliance Securities Limited | NSE SEBI Registration Number Capital Market :- INB 231234833 | BSE SEBI Registration Number Capital Market :- INB 011234839 | NSE SEBI Registration Number Derivatives :- INF 231234833 Commodities : Trading through Reliance Commodities Limited | MCX member code: 29030 | NCDEX member code: NCDEX-CO-05-00647| NMCE member code: CL0120 Mutual Funds : Reliance Securities Limited | AMFI ARN No.29889

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.

13