BNP Paribas puts 'reduce' on Hindalco

HINDALCO INDUSTRIES

RESEARCH: BNP PARIBAS

RATING: REDUCE

CMP: RS 64

BNP Paribas initiates coverage on Hindalco Industries with a ���reduce��� rating . Hindalco���s operating performance is leveraged to aluminium prices. Global aluminium consumption growth is likely to slow to about 3% (from 11.6% in ���07), and remain in the range of 3-4 % in ���09 and ���10.

Weakening global demand will cause aluminium prices to remain subdued at $2,100/tonne in the near term, based on trends witnessed in previous market downturns. BNP Paribas thinks a price level of $2,100/tonne is unsustainable and expects a bounce-back , but overall, a weak pricing environment will persist in the short term.

Hindalco will need to raise additional $ 3 billion in debt to spend $ 4.5 billion on capital expenditure (capex) in the next three years. These projects are in initial stages and may be postponed if aluminium prices remain subdued, while copper prices continue to move up due to rising energy and input prices.

The target price of Rs 68 is based on an enterprise value (EV) to FY10 EBITDA multiple of 5x. In the past, Hindalco���s valuation has trended towards a 5x EBITDA multiple in an environment of declining prices.