Analyst: Kunal Motishaw ; Aluminium Sector Cost push to keep prices firm

Transcription

1 Analyst: Kunal Motishaw ; Aluminium Sector Cost push to keep prices firm September

2 Executive Summary 3 Industry Section 6 Aluminium Price Outlook 28 Company Section Hindalco Industries Ltd.: Capacity expansion delayed but in sight 30 NALCO Ltd.: Higher Coal costs to hit profitability 49 2

3 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jun-10 Oct-10 Feb-11 Jun-11 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 and fuel) 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 which have increased significantly. Recent unrest in the Middle East could also disturb production in these countries (~3.2mn tonnes output in CY11E). Prior to 2004, supply-demand situation largely determined prices. However, post 2004, there is a higher co-relation seen between smelter costs and aluminium prices. Hardening alumina prices are also affecting non-integrated players, pushing up end prices. We expect aluminium prices to average at US$2,300/tonne in FY12E and FY13E. Worldwide Aluminium Demand - Supply (000 Tonnes) CY08 CY09 CY10 CY11E CY12E Production 39,518 36,728 40,967 46,865 49,762 Consumption 37,511 35,518 40,362 43,837 47,492 Surplus/(Deficit) 2,007 1, ,028 2,270 Average LME Prices (US$/tonne) 2,571 1,667 2,173 2,300* 2,300* * FY12E and FY13E respectively Source: Metal Bulletin, Industry, IDBI Capital Research Steam coal prices show no sign of cooling off 1,200 1, (CNY/Tonne) Aluminium cost curve ~25% of global production in the red Source: Alcoa, IDBI Capital Research 3

4 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Executive Summary (cont d) Consumption in recovery mode: We expect global aluminium consumption to increase by 8.6% in CY11 to 43.8mn tonnes and 8.3% in CY12 to 47.5mn tonnes respectively, largely led by continued growth in China and recovery in the western world. Production to follow suit: We expect global production to increase by 14.4% to 46.8mn tonnes in CY11 and 6.2% to 49.7mn tonnes in CY12 backed by China and other Asian countries. Inventory unlikely to fall: Fall in demand in 2008 and 2009 led to an arbitrage opportunity when contago (Traders sold futures and bought spot) was higher than cost of funds + storage costs. As per industry estimates ~75% of the inventory on the LME (~10% of CY11 production) is locked up in such financing deals. Further, warehouses are incentivizing stocks to remain locked by offering discounts in storage costs. Hence, in our view, not much of this inventory will be available for sale in the spot market. World Aluminium Consumption 5.2% CAGR growth ( ) 50,000 45,000 40,000 35,000 30,000 25,000 20, E 2012E Source: Metal Bulletin, Industry, IAI, IDBI Capital Research LME Inventory build up No letting up 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 World Aluminium Production 6.1% CAGR growth ( ) 60,000 50,000 40,000 30,000 20, E 2012E Source: IAI, Industry, IDBI Capital Research 4

5 Executive Summary 3 Industry Section 6 Aluminium Price Outlook 28 Company Section Hindalco Industries Ltd.: Capacity expansion delayed but in sight 30 NALCO Ltd.: Higher Coal costs to hit profitability 49 5

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 Growth over the decade was fueled by China which saw a CAGR growth of 18.5% over the same period. Going forward, we expect world aluminium demand to grow by 8.6% in 2011 and 8.3% in 2012 partially aided by recovery in developed nations. China, the largest consumer of Aluminium in the world will continue to dominate albeit at a slower pace. ('000 tons) E 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 (%) 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 (%) (1.7) (19.6) (22.2) 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 (%) (7.8) (16.8) 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 (%) (5.6) 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 (%) (6.2) 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 (%) (1.1) 3.6 (18.4) Africa & Oceania ,112 1,153 1,227 1,249 1,295 Growth (%) (1.1) (5.8) World 25,651 27,742 30,472 32,009 34,345 37,562 37,511 35,518 40,362 43,837 47,492 Growth (%) (0.1) (5.3) Source: Metal Bulletin, IAI, IDBI Capital Research 6

7 China Domination to continue We expect China to continue dominating the global aluminium scenario with a 13.7% growth in consumption in CY11 and a 12.4% growth in CY12 to 18.8mn tonnes and 21.1mn tonnes respectively. China is expected to account for ~45% of total global aluminium consumption in CY12 from 16.4% in CY02. Although the Chinese authorities have expressed some concern on their over heating economy, in our view, it would be a controlled slow down and don t see a major impact on aluminium consumption. Chinese growth seems to be steadily decelerating towards a more sustainable level. China as a % of world demand 16% in 2002 to 45% in 2012E China Aluminium demand and GDP- Positive co-relation seen 40% 30% 20% 10% 0% CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 GDP Growth ALI Demand Growth Source: IMF, Bloomberg, IDBI Capital Research China Aluminium usage break up CY10 50% 40% 30% Packaging 8% Electrical 10% Others 2% Automobiles 29% 20% 10% Machinery and equipment 11% 0% E 2012E Consumer durables 9% Construction 32% Source: Metal Bulletin, Bloomberg, IDBI Capital Research Source: Industry, IDBI Capital Research 7

8 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 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Jan-92 Jan-93 Jan-94 Jan-95 Dec-95 Dec-96 Dec-97 Nov-98 Nov-99 Nov-00 Oct-01 Oct-02 Oct-03 Oct-04 Sep-05 Sep-06 Sep-07 Aug-08 Aug-09 Aug-10 Jul-11 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 seven months of CY11, this high growth has enabled sustained high spending on infrastructure projects along with increased consumer spending in terms of higher house and auto sales. Although lending has slowed from peak levels, growth in many sectors remains high especially in the real estate sector where investments grew by ~35% YoY. High bank credit growth is also reflected in the Purchase Managers Data (PMI), which has showed sustained performance post the fall in end China Loan disbursals(rmb bn) 19% CAGR growth over 18 years 60,000 50,000 40,000 30,000 20,000 10,000 0 Chinese Manufacturing PMI

9 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 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. This augurs well for the machinery and equipment, construction and the electrical segments which cumulatively account for ~53% of the total aluminium end user industry in China. However, it must be noted that higher growth witnessed in earlier years (~37% average from CY05 to CY09) has slowed largely to contain the overheating economy. The automobile industry which accounts for 29% of the 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 for trading in old, polluting vehicles for newer ones, which was previously due to expire on May 31st 2010 was extended upto end This subsidy was introduced in January 2009 as part of a number of incentives designed to boost auto output and sales. Investment in Fixed Assets (Rmb bn) 27% CAGR over 8 years 16,000 12,000 8,000 4,000 0 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 China Auto Production: In sustainable high trajectory 2,000,000 1,500,000 1,000, ,

10 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 increased by 8% in CY10. Going forward, we expect demand to grow by 4.1% in CY11 and 4.6% in CY12. The regions share in total consumption has been falling consistently and reached 12.6% in Going forward, we expect this to further fall to 11.6% by CY12 North America and Canada in recovery mode 20% 10% 0% (10)% (20)% (30)% CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 GDP Growth ALI Demand Growth Source: IAI, IMF, Bloomberg, IDBI Capital Research North America and Canada as a % of world demand US Aluminium end users 30% 25% 20% 15% 10% Consumer durable 7% Machinery 8% Power 9% Others 3% Transportation 39% 5% 0% E 2012E Source: IAI, IMF, Bloomberg, IDBI Capital Research Construction 9% Source: Industry, IDBI Capital research Packaging 25% 10

11 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 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Nov-89 Nov-90 Nov-91 Nov-92 Nov-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Jul-09 Jul-10 Jul-11 North America Recovering smartly US saw the worst ever contraction in PMI since 1982 and reached a bottom of 32.9 in December Just as it was the first of the world s major economies to slide into recession, it has been one of the first to fully emerge from it. Further, what is encouraging is the fact that the recovery is being led by manufacturing sector, however problems in the construction space persist. Part of the recent strength of US manufacturing can be attributed to the boost from re-stocking. We expect aluminium demand to grow by 4.1% in 2011 and 4.6% in Transportation accounts for 39% of total aluminium usage in US, which saw a sharp decline in 2008 and 2009 mainly from the automotive sector. GM and Chrysler filing for bankruptcy triggered the downfall in automotive numbers. However, depleted inventories and fleet sales allowed automotive producers to increase production in CY10 to 92.89mn units up 35% YoY. Growth for 1HCY11 was up 8.3% YoY. The encouraging part is that production has remained above 7mn tonnes for over 22 months now. USA Manufacturing PMI Motor Vehicle assemblies (mm units)

12 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 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 North America Recovering smartly (cont d) The construction and machinery segment which account for ~17% of aluminium consumption, has rebounded strongly from the lows hit during the financial crisis. Although the residential construction sector is showing some signs of improvement, the best that can be said of the non-residential sector is that it is starting to stabilise, but with downward bias. The end of the homebuyer tax credit in April 2010 has had a dramatic impact on residential construction activity. Weak sales continue to discourage US homebuilders. However, housing starts were up 6% YoY in CY10, the first year since 2005 in which the residential construction sector making a positive contribution to the US economy. Machinery and Construction Index US Housing starts (000 units) 2,500 2,000 1,500 1,

13 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, the biggest fall after North America. However with expansion in the manufacturing sector, aluminium sector witnessed a rebound and demand grew by 9.3% YoY in CY10. Going forward, we expect a modest growth of 2.4% in CY11 and 4.1% in CY12 on the back of renewed financial problems resulting in overall real economy being relatively muted. However, export of high end cars to Asia from Germany could spring up a positive surprise. EU s share in world aluminium consumption is expected to decline from 15.7% in 2009 to 13.6% in EU showing encouraging signs 10% 5% 0% (5)% (10)% (15)% (20)% CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 GDP Growth ALI Demand Growth Source: IMF, IAI, IDBI Capital Research EU as a % of World demand EU Aluminium end users 26% 24% 22% 20% Machinery and Equipment 14% Others 7% Automobiles 40% 18% 16% 14% 12% 10% Packaging 15% Construction 24% E 2012E Source: Industry, IAI, IDBI Capital Research Source: Industry, IAI, IDBI Capital Research 13

14 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 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 May-09 May-10 May-11 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 EU Slow recovery As can be seen from the PMI data alongside, recovery has been slow as compared to other regions. After touching a low of 33.5 in February 2009, it reached over 50 only in October In our view, CY10 aluminium demand could be largely aided only by some inventory restocking. The construction sector which accounts for ~24% of the total aluminium consumption in EU has seen dismal growth over the past few months. This was mainly due to output growing only in 5 of the 27 countries. Going forward, civil engineering and public sector construction spending will be obvious targets for government cuts thus putting more pressure on this sector. EU 27 PMI Struggling to keep its head above the water Euro Monthly construction Index Dismal show

15 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 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 Jun-11 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 EU Slow recovery (cont d) Auto demand, a key driver for aluminium growth (~40% of consumption) has remained poor. The government backed incentive schemes in order to encourage consumers to trade in their older vehicles with new ones, which was designed to draw down excessive inventories of unsold vehicles and prevent plant closures till demand returned, has failed and with the end of these schemes, demand has waned. Passenger car registrations fell 8% YoY in CY10, while de-growing 2% for the 1HCY11. EU 27 Car registration numbers Volatile show 1,400,000 1,200,000 1,000, , , , ,000 0 The machinery and equipment segment which accounts for 14% of total aluminium demand, was the worst hit, but has shown some recovery in recent times. Eurozone capital goods index- Recovery of sorts

16 Asia India the Jewel in the Crown The Asia region excluding China witnessed a 11.4% growth in Aluminium demand in CY10 as against a CAGR growth of 4.5% from CY02-CY10. Going forward, India is expected to stand out amongst other Asian economies with a growth of ~12% in CY11 and 11% in CY12. In 2011 and 2012, aluminium consumption in the region is expected to grow by 7% and 6% respectively backed by strong growth in India, South Korea. Demand in Japan has increased post the recent earthquake and premiums paid to suppliers are at near record levels on increasing imports. Asia (excl China) as a % of World Consumption 23% 22% 21% 20% 19% 18% 17% E 2012E Source: IAI, Industry, IDBI Capital Research India share growing among Asia (excl. China) Japan 25% Others 54% India 21% Source: Industry, IDBI Capital Research 16

17 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Asia Japan in steady state Japan accounts for 25% of total aluminium consumption in the Asian region (ex-china). The PMI for Japan contracted significantly to 29.6 in January 2009, the worst as compared to other economies. However, it recovered and crossed the 50 mark in July 2009, and currently stands at It must be noted that due to the worst earthquake in its history, PMI for the month of March and April 2011 dipped to 46.4 and 45.7 respectively. Japanese carmakers produced 9.62mn vehicles in CY10, up 23% YoY. It must be noted that vehicle production in 2009 at 7.93 mn was the lowest ever since 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 down 60.1% YoY and the lowest since 1982 (data range start). In our view, over the long term, the Japanese auto market could be a good demand driver for aluminium on account of increased production of hybrid cars. Hybrid cars require large amount of aluminium vis-à-vis normal cars. Japan PMI Recovering after the quake Japanese Auto Production Future demand driver for the region 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,

18 Apr-05 Oct-05 Mar-06 Aug-06 Jan-07 Jul-07 Dec-07 May-08 Oct-08 Apr-09 Sep-09 Feb-10 Aug-10 Jan-11 Jun-11 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 only other Asian economy besides China to show a double digit growth in aluminium consumption in Going forward, government and consumer spending including large infrastructure projects and government led anti poverty schemes will enable aluminium demand in India growing at a rapid pace. The power and automotive sectors are expected to be a major contributor to this growth. The solar power market is another growth area for the sector as aluminium is the material of choice for frames for solar panels. The government is taking steps to increase investment in solar power and the rate of return available to investors in renewable energy plants, including solar power, was increased in September 2010 from 14-16% to 19-24%. India Aluminium end users Industrial 6% Packaging 9% Automobile 15% Consumer durable 7% Construction 14% Source: Industry, IDBI Capital Research Others 2% Capital goods index: In long term growth mode Power 47% 18

19 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Production Back on growth path Global Aluminium production has grown at a CAGR of 6.1% from and has managed to keep pace with consumption growth. Going forward we expect production to grow by 14.4% YoY in 2011 and 6.2% in 2012, after a 11.5% growth in However, with the addition of capacity in various parts of the world, we believe that the industry will continue to see excess capacity in 2011 and Monthly aluminium production (kt) Slow but steady growth 4,000 3,750 3,500 3,250 3,000 2,750 2,500 Source: IAI, Bloomberg, IDBI Capital Research ('000 tons) E 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 (%) (1.1) 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 (%) (7.0) 5.3 (0.9) (17.7) (1.4) 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 (%) (3.9) (19.5) 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 (%) 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 (%) (5.8) (6.7) 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 (%) (13.1) 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 (%) (0.2) (2.9) (2.9) 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 (%) (7.1) Source: IAI, Industry, IDBI Capital Research 19

20 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Production China slowing in line with consumption Chinese aluminium production has grown at a CAGR of ~19% over the past decade. However, due to high production costs at many smelters in the country, they have become unviable and hence shut down, some even permanently. Hence, on an overall basis capacity utilization has come down significantly and production in the current year has been slow. Going forward with significant capacity addition, we expect growth to come back to high levels. We expect production in China to grow by 22.5% in 2011 and 5.7% in 2012 to 19.7mn and 20.8mn tonnes respectively. China Monthly Aluminium production (kt) Firing on all cylinders 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1, Source: Bloomberg, IAI, IDBI Capital Research China as a % of world production Domination continues 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: IAI, Industry, IDBI Capital Research 20

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 ~11mn tonnes (~48% of current capacity) by CY17. Smelter Capacity addition 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 Source: Industry, IDBI Capital Research 21

22 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 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% over CY01-CY10 as against a world average of 6.2% and 19% for China. This region showed good resilience during the downturn and reported a production growth of 5.2% in 2009 and in turn increasing its share in global production from 10.7% in CY08 to 12.1% in CY09. This jump in production was largely due to low costs and increasing capacities. Going forward, this region is expected to report a growth of 23% in 2011 and 13.2% in It is expected to add around 7.67mn tonnes of capacity by Asia (Ex-China) Monthly production Asia (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 Source: Industry, IDBI Capital Research Source: IAI, Bloomberg, IDBI Capital Research 22

23 Developed World Showing signs of stability Developed nations have been losing share in total aluminium production largely due to a fall in production over the last decade and a drastic fall in 2009 (17.7% in North America and 19.5% in West Europe). Production has de-grown at a CAGR rate of - 1.2% from CY01-CY10 in North America and has remain 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 4.89mn tonnes respectively on the back of a recovery in the overall economic situation. Western Europe is expected to grow by 6.2% in 2011 and 7.3% in 2012 to 4mn and 4.3mn tonnes respectively. North America, Canada and western Europe have seen a 3.3% and 7.6% growth in production in the current year till May 2011 on the back of increasing capacity utilization. Share in Global Production Stabilising at current levels 25% 20% 15% 10% 5% E 2012E North America & Canada West Europe Source: IAI, Industry, IDBI Capital Research Capacity Utilisation Continues to be low 110% 100% 90% 80% 70% 60% North America & Canada West Europe Source: IAI, Industry, IDBI Capital Research 23

24 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Inventory High but. The fall in demand post the financial crisis led to a steep jump in inventory on the LME. Currently inventory is close to all time highs and way above the average of the previous decade. However, inventory on the SHFE has come down significantly as compared to its peak levels. The jump in inventory on the LME is also reflected in the weeks of usage which increased significantly in 2009, but has come off in 2010 on the back of increased demand. LME Aluminium Inventory At all time highs 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Weeks of usage SHFE Aluminium Inventory Depleting fast , , , , , , , ,000 50,

25 May-00 Oct-01 Feb-03 Jul-04 Dec-05 Apr-07 Sep-08 Jan-10 Jun-11 Jun-91 Apr-93 Feb-95 Dec-96 Oct-98 Aug-00 Jun-02 Apr-04 Feb-06 Dec-07 Oct-09 Aug-11 locked in financing deals A large part of the inventory on the LME is locked in financing deals (carry trade) and remains a feature of the aluminium market, with many deals even held in rent agreements. Further, as per data the same is reportedly being rolled over for another year. The forward prices trading at a significant premium to spot prices led to this phenomenon. The 15-month forward price premium had jumped to as high as 15.6% as against a discount historically. Significant premium in CY08 & CY09 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Spot Price 15 months forward 27 months forward As aluminium prices go up, premiums could narrow resulting in these financing deals being unwound, and putting pressure on aluminium prices if the same is available in the market. Forward premiums close to zero discount 40% 20% 0% (20)% (40)% 4,000 3,000 2,000 1, months forward (%) 27 months forward (%) Spot Price 25

26 Jul-03 Jan-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Jan-96 Dec-96 Nov-97 Oct-98 Sep-99 Aug-00 Jul-01 Jun-02 May-03 Apr-04 Mar-05 Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Co-relation between inventory and prices broken The inverse co-relation between Aluminium prices and the LME inventory was broken off during The aluminium prices after touching its low in February 2009 has been rising steadily along with the inventory pile up. The jump in the Aluminium prices was triggered by China s SRB stocking, increased fund activity and an artificial shortage created, as a good amount of inventory is locked up in financing deals. The other support mechanism for higher prices is the cost curve. Current prices of around US$2,350/t equate to the ~75th percentile of costs with a large amount of production cash negative. Of this the majority is Chinese production and as such this is most vulnerable to closure if prices were to dip by even ~15% from current levels. Co-relation broken 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 LME Inventory Chinese Aluminium prices continue to trade at a premium 3,500 3,000 3,500 2,800 2,100 1, Spot Price 2,500 2,000 1,500 1,000 LME Ali Spot (US$/tonne) Shanghai Ali spot (US$/tonne) 26

27 Executive Summary 3 Industry Section 6 Aluminium Price Outlook 28 Company Section Hindalco Industries Ltd.: Capacity expansion delayed but in sight 30 NALCO Ltd.: Higher Coal costs to hit profitability 49 27

28 Jan-91 Jan-92 Jan-93 Feb-94 Feb-95 Feb-96 Mar-97 Mar-98 Mar-99 Apr-00 Apr-01 Apr-02 May-03 May-04 Jun-05 Jun-06 Jun-07 Jul-08 Jul-09 Jul-10 Aug-11 Jan-94 Dec-94 Dec-95 Dec-96 Dec-97 Nov-98 Nov-99 Nov-00 Oct-01 Oct-02 Oct-03 Oct-04 Sep-05 Sep-06 Sep-07 Sep-08 Aug-09 Aug-10 Aug-11 Aluminium Price Outlook Commodity prices have seen a sharp rally since February 2009 after a free fall. However, Aluminium has shown relatively less volatility in prices on account of its poor fundamentals. This is likely to cushion the Aluminium prices in the event of a fall in prices. US$ and commodity prices are inversely co-related as reflected from the chart. The depreciating dollar hence supported the commodity price jump recently. In the event of the dollar appreciating against the other currencies, the commodity prices are likely to see a fall. We expect the Aluminium price to trade in a band of US$2,100/tonne to US$2,600/tonne. Any jump in the metal prices could lead to the unwinding of the financing deals and hence exert the pressure on the prices. Further the marginal cost of production and the SRB buying is likely to act as a support to the prices in case of a downward move. Aluminium one of the worst performer 1,000 Inverse co-relation Aluminium Copper Zinc Lead 3,500 3,000 2,500 2,000 1,500 1,000 Dollar Index Aluminium price 28

29 Executive Summary 3 Industry Section 6 Aluminium Price Outlook 28 Company Section Hindalco Industries Ltd.: Capacity expansion delayed but in sight 30 NALCO Ltd.: Higher Coal costs to hit profitability 49 29

30 Hindalco Industries BUY (HNDL IN/HALC.BO) CMP: Rs145 MCAP: Rs277.5 bn Target: Rs180 Capacity expansion delayed but in sight Financial snapshot (Consolidated) (Rs mn) Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%) FY09 654,146 29, , (0.1) FY10 605,484 69, , FY11 718,008 80, , FY12E 797,531 80, , FY13E 855,987 90, ,

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 in completion, 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 areas and is awaiting forest clearance has already been discounted in the recent stock correction, hence any positive outcome on that front could improve valuations. Novelis s EBITDA has been growing steadily backed by volume jump (due to economic recovery) and cost cutting activity. Also, post the cessation of price ceiling can contracts, Novelis has reported buoyant numbers and is reaping benefits of higher aluminium prices unlike in the past. With increasing use of aluminium rolled products for automotive body panels in certain geographies, Novelis is slated to be one of the key beneficiaries. We expect Novelis 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 refining charges). 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 from FY11-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. 31

32 Apr-03 Oct-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 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, the company managed to overcome these shortfalls and successfully came out and we believe will continue to post strong results going forward backed by investments in fast growing economies of India, Brazil and other Asian countries. The expansions in the Indian aluminium business as well as turnaround of Novelis are likely to multiply profits. We expect financial leverage to come down to comfortable levels despite Hindalco s aggressive expansion plans. We expect consolidated 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. Valuation - FY13E (Rs mn) Basis Multiple FY13E Hindalco Aluminium EBIDTA ,378 Copper (incl ABML) EBIDTA ,313 Novelis Adjusted EBIDTA ,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 Source: IDBI Capital Research Hindalco has traded at an average of 7.2x 1-yr forward EV/EBITDA

33 Assumptions FY08 FY09 FY10 FY11 FY12E FY13E Domestic Aluminium Business Volumes (Tonnes) 473, , , , , ,373 Aluminium Price (US$/tonne) 2,620 2,234 1,865 2,256 2,300 2,300 Blended Realizations (INR/Tonne) 131, , , , , ,447 Net Revenues (Rs mn) 68,364 72,500 67,091 76,360 88, ,784 Domestic Copper Business Volumes (Tonnes) 319, , , , , ,189 Copper Price (US$/tonne) 7,588 5,885 6,099 8,138 8,250 8,250 Net Revenues (Rs mn) 115, , , , , ,985 Novelis Business Volumes (mn Tonnes) Aluminium Price (US$/tonne) 2,620 2,234 1,865 2,256 2,300 2,300 Realization (USD/Tonne) 3,576 3,458 3,039 3,420 3,636 3,649 Revenues (US$ mn) 11,246 10,177 8,673 10,591 11,355 11,944 EBITDA (US$mn) , ,030 1,113 EBITDA/tonne (US$) 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)

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 integrated with Captive power plants, bauxite mines and coal mines. Cost of production at Hirakud is ~US$1,400/tonne, while that of Renukoot is ~US$1,550/tonne as coal for the power plant is procured through linkages, e-auction and open market purchases. However, while most of its bauxite requirements are met through captive mines, the company also buys bauxite from third-party mines to benefit from low regional pricing and preserve its own bauxite. Further, Hindalco is the only aluminium producer in India with high level of sales in the form of value added products(~60%), thus making it less prone to the volatile LME prices. Also, the company is in the process of relocating its closed FRP plant at Rogerstone (UK) to Hirakud (Orissa) with a capex of US$180 mn. This plant is likely to be commissioned by FY13. This facility has a production capacity of 150,000TPA of value added beverage can products, and will be later expanded to 285,000TPA by We have assumed that premium earned on value added products over the LME price will remain largely stable going forward. Premium to LME (%) FY05 FY06 FY07 FY08 FY09 FY10 FY11 Rolled products Extruded products Redraw rods Foils Value added as a % of total aluminium sales 75% 70% 65% 60% 55% 50% FY05 FY06 FY07 FY08 FY09 FY10 FY11 34

35 Expansion plans delayed but in sight Hindalco s brownfield (Rogerstone plant transfer, Hirakud expansion) and greenfield projects (Utkal Alumina, Mahan Aluminium, Aditya Aluminium) have seen some delays and are expected to be commissioned 3-9 months behind initial completion dates. We have assumed only a small portion of the volumes from these ventures in our FY12 estimates, while larger benefit accruing in FY13. The company incurred a capex of Rs65 bn towards its greenfield projects in FY11. However, any further delay in commissioning of these projects will adversely effect domestic earnings. Financial closure for Utkal Alumina (1.5 mtpa refinery) as well as Mahan Aluminium (359ktpa smelter) has been achieved and bauxite mine clearances are in place (sourced from Baphlimali mines 20kms away from site). Further, in our view lack of visibility on the Mahan coal block which is currently within the MoEF s No- Go areas and is awaiting forest clearance has already been discounted in the recent stock correction, hence any positive outcome on that front could improve valuations. Shifting focus to growth 5,000 4,000 3,000 2,000 1, ,263 1,321 1,321 1,321 Further delay to adversely affect domestic numbers ,680 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 (000 tonnes) Aluminium (Ktpa) Alumina (Ktpa) Aluminium (Ktpa) Power Plant (MW) Time Frame Alumina (Ktpa) Capex (Rs bn) Utkal Alumina - 1, CY12 71 Mahan Aluminium Aditya Aluminium Aditya Refinery Jharkhand Aluminium QFY QFY , CY CY

36 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Copper Volatile margins but no major impact Hindalco owns and operates three copper smelters totaling 500,000tpa at Dahej, which is a steady source of income for the company. Although Hindalco currently has no plans to increase capacity further, we believe it will continue contributing ~10% to consolidated EBITDA over the next couple of years. By-products like sulphuric acid and precious metals will continue help maintaining profitability even if TC/RC margins were to dip. TcRc margins have bounced back from recent lows and for CY11 Japanese benchmark TCRC stood at 14.4c/lb up from 11.9c/lb in CY10. Going forward copper processing fees are expected to remain high on the back of smelter shuts in Japan post the earthquake and lower imports by China. Hindalco owns a 51% stake in Aditya Birla Minerals (ABML) which in-turn owns 100% in Nifty and Gordon copper mines operating in Australia. 100% output from these mines is used to smelt copper at Dahej. However, it meets only ~10% of Hindalco s concentrate requirement. Copper margins Volatile but relatively insignificant 7% 6% 5% 4% 3% 2% 1% 0% Copper as a % of Domestic PBIT 50% 40% 30% 20% 10% 0% 36

37 Special grade Alumina Low price volatility Special grade Alumina volumes 500, , , , ,000 Hindalco operates a 350,000 TPA alumina refinery in Belgaum and is an export oriented unit of metallurgical alumina and special alumina and hydrates. Prices of special grade alumina is less volatile in nature and this unit contributes ~Rs3 bn to EBITDA each year. We expect this trend to continue. 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Realisation (US$/tonne) higher realisations to sustain FY05 FY06 FY07 FY08 FY09 FY10 FY11 37

38 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 (US$/ton) Novelis Aluminium prices have marginal impact Aluminium price swings have a limited impact on the profitability of Novelis due to the nature of its operations, and has more so to do with cost cutting measures. However, the impact is restricted to the profitability of its South American operations and the metal price lag. Very low degree of co-relation 3,500 3,000 2,500 2,000 1,500 1, % 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% Aluminium prices (LHS) PBIT Margins (%) (RHS) Novelis South American operations are partially integrated with captive bauxite mine, power plant and alumina and 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) from 31st 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. PBIT Margins (%) Q1FY12 Q4FY11 Q3FY11 Q2FY11 Q1FY11 Q4FY10 Q3FY10 Q2FY10 Q1FY10 Q4FY09 Q3FY09 Q2FY09 Q1FY09 Q4FY08 Q3FY08 Q2FY08 Q1FY08 North America Europe Asia (0.7) (0.8) South America

39 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 (US$/ton) Novelis Aluminium prices have marginal impact (cont d) Profitability of the South American operations have a direct co-relation with Aluminium prices due to its partial backward integration into primary aluminium which can be seen in the chart alongside. Partial backward integration helps it earn better margins 4,000 3,500 3,000 2,500 2,000 1,500 1, % 18.0% 15.0% 12.0% 9.0% 6.0% 3.0% Aluminium prices (LHS) PBIT Margins (%) (RHS) 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 will also invest in finishing equipment and ancillary improvements. The expansion is likely to be completed by FY13. South American Operations Contribution (%) Q1FY12 Q4FY11 Q3FY11 Q2FY11 Q1FY11 Q4FY10 Q3FY10 Q2FY10 Q1FY10 Q4FY09 Q3FY09 Q2FY09 Q1FY09 Q4FY08 Q3FY08 Q2FY08 Q1FY08 Sales EBIT

40 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10* Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10* Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 (US$ mn) (US$) Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Shipments (000 tonnes) 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 per year, expiry of price ceiling contracts and return of pricing power, largely due to changing dynamics of the industry. Novelis reported an Adjusted EBITDA of over US$1 bn in FY11 and going forward we expect this performance to continue. However volumes are expected to remain flat in FY12E due to capacity constraints and grow by ~5% in FY13. Recovery in global markets have helped volumes increase and inturn profitability. Adjusted EBITDA/tonne stood at US$306/tonne in FY11. We have assumed an EBITDA/tonne of US$330 for FY12E and US$340 for FY13E.? Operating at Peak capacity Total N. America Europe Asia S. America Adjusted EBIDTA Sustainable at current levels Adjusted EBIDTA per tonne Stark improvement over the years * EBITDA/tonne as it includes unrealised gain on derivates instrument to the tune of US$1,091 mn. 40

41 Novelis Turnaround backed by pricing power and cost cutting (cont d) The jump in EBITDA is also due to its rich product mix and pricing power for 70% of its products. Beverage can feedstock, which accounts for ~60% of its product mix is a specialised and customized product in terms of gauge, finish, width and alloy. Novelis has gained a leadership position in this business. Apart from Novelis, there are only 3 other players that supply beverage can feedstock (Alcoa, Aleris and Hydro). Over the past few years, with investment in technology the focus of all players including Novelis has been to continuously reduce the thickness of the can body sheet, but maintaining the required strength. This has helped Novelis expand margins due to higher value addition. As a part of the cost cutting exercise, the company has also ceased operations of various plants in different geographies. Premium over LME Sustainable due to high degree of value add 100% 80% 60% 40% 20% 0% FY07 FY08 FY09 FY10 FY11 North America Europe Asia South America 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 41

42 (US$ mn) 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 unfavorable contracts with key customers did not allow re-pricing of conversion premium and some of these contracts did not allow it to even pass on the increase in LME aluminium prices. This resulted in suppressed margins and heavy losses when LME aluminium prices increased significantly. Hindalco has not renewed these can contracts and Novelis is now able to negotiate better conversion premium with its clients. Metal Price Ceiling Contracts Best forgotten FY07 FY08 FY09 H1FY09 H1FY10 42

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 ( ). 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 near 100% 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 next three 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 by 50% by end 2012 and South Korea where it is increasing FRP capacity by 300ktpa by Novelis capacity expansion In response to projected market growth 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 Brazil Expansion ~220ktpa + ~30ktpa de-bottlenecking Europe De-bottlenecking ~90ktpa Asia 600 1,000 ~350ktpa expansion + ~70ktpa de-bottlenecking Total 3,000 4,000 43

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 significant improvement in cash flows and we expect it to drop further going forward despite huge capex plans. Debt Equity At comfortable levels FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E 44

45 Apr-03 Oct-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 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, the company managed to overcome these shortfalls and successfully came out and we believe will continue to post strong results going forward backed by investments in fast growing economies of India, Brazil and other Asian countries. The expansions in the Indian aluminium business as well as turnaround of Novelis are likely to multiply profits. We expect financial leverage to come down to comfortable levels despite Hindalco s aggressive expansion plans. We expect consolidated 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. Valuation - FY13E (Rs mn) Basis Multiple FY13E Hindalco Aluminium EBIDTA ,378 Copper (incl ABML) EBIDTA ,313 Novelis Adjusted EBIDTA ,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 Source: IDBI Capital Research Hindalco has traded at an average of 7.2x 1-yr forward EV/EBITDA