Citi downgrades Hindalco to sell; cuts target price

MUMBAI: CitiGroup has downgraded Hindalco Industries to ‘sell’ from ‘buy’ earlier and reduced the target price to Rs 118 from Rs 164 earlier.

According to a Citi report, factors such as muted aluminum outlook, rising costs in existing operations, less viable project economics (Mahan/Aditya) and an appreciating rupee are leaving little room for upside.

“While stock performance has been strong in the past month (as has the LME), we think there is little room for upside as we expect LME to be range-bound. Despite being among the lowest cost producers globally ($1,800-1,850/t), Hindalco has been impacted by rising power/fuel (local factors) and raw material costs. Also, economics of new projects have changed,” the report said.

“We expect volumes to rise 31 per cent in FY14, albeit at a high cost as new production from Mahan will be without captive coal. The expectation that the Aditya smelter will be amongst the lowest cost globally is jaded by the fact that capex cost is up 30 per cent and rupee appreciation does not help,” added the report.

The brokerage values Hindalco’s standalone business at 7.5x FY14E EV/EBITDA and Novelis at a slight discount to Hindalco.

“While global multiples have derated, we maintain target multiples for Hindalco as earnings are depressed cyclically; EBITDA is lower than the steady state without Mahan coal. Rolling forward to March 14 from September 13, we arrive at a target price of Rs118 (Rs29/share for standalone; Rs89/share for Novelis/others),” it said.

The stock witnessed selling pressure in today’s trade and closed at Rs 120.60, down 3.52 per cent on the BSE. It touched a high of Rs 124.70 and a low of Rs 119.80 in trade today.