Hot Stock: Deutsche Bank sees over 26% upside in Hindalco

MUMBAI: Deutsche Bank has maintained ‘Buy’ recommendation on Hindalco Industries after quarterly results and a target price of Rs 138, an upside of over 26 per cent, from the current market price.

Hindalco reported 24.68 per cent decline in standalone net profit at Rs 482.03 crore for the fourth quarter ended March 31, 2013, mainly due to fall in sales and significant rise in interest outgo.

According to the brokerage, the company’s 4Q'FY13 standalone EBITDA at Rs 6.43 billion was in line with Deutsche Bank estimates. However, the recurring net profit at Rs 4.82 bililon was 45% above the brokerage’s estimates primarily driven by higher ‘other income’ and lower tax rate.

“The upstream aluminum business benefited from progressive stabilization of operations post the pot outage last year and an improvement in product mix resulting in a 252 bps QoQ improvement in EBIT margins, despite a flat LME Aluminum. The performance of the copper business was also impressive with a 78 bps sequential improvement in EBIT margins during the quarter,” the report said.

The company has begun trial production at both Mahan aluminum and Utkal alumina projects.

“With charging of bauxite at Utkal having started, we assign a high probability of company announcing formal commissioning very soon at both plants, in line with its earlier guidance. The past seven years (FY07-13) for Hindalco India have been characterized by rising capex/elevated CWIP and declining EBITDA on account of delayed project commissioning. Hindalco is now poised for a trend reversal with FY14 marking the first year of declining CWIP and improving EBITDA,” the report added.

Deutsche Bank has valued Hindalco’s upstream aluminum/custom copper smelting/Novelis at FY14 EV/EBITDA of 6x/5x/6.8x.

“At the current market price, the stock is trading at the lower end of its 10-year trading band which should provide strong valuation support at current levels. At our TP, Hindalco would trade at FY14E P/BV of 1x (ex-goodwill), still at a discount to its 10-year average,” the report added.

Delay in capacity expansions, rising energy costs and Delay in securing government approvals for mining operations are some of the risk factors that may affect the company’s performance.



Following are views of other brokerages on the stock after Q4 results:

Brokerage	View	Target price
JP Morgan	Overweight	Rs 160
Barclays	Overweight	Rs 145
Morgan Stanley	Equalweight	Rs 95
CLSA	Sell	Rs 96