Re-rating could be around the corner

Hindalco Industries remains among our top picks in India and we remain overweight with a price target of R160, implying 50% upside potential. In our view, the current stock price of Hindaclo is only pricing in Novelis (downstream subsidiary, 100% owned) and a part of the current India business in FY14e and not even Novelis in FY15e. With project commissioning on the way and India aluminium recovery (as production stabilises), we expect the sharp discount to our fair value estimate to narrow.

Admittedly, reported earnings for the standalone business would be under pressure given higher capital costs as projects start flowing through the P&L (profit& loss account), however, cash earnings should pick up as the projects deliver positive Ebitda.

Our December 2013 price target of R160 is based on our FY14e sum-of-the-parts (SOTP) valuation. We remain Overweight given the inexpensive valuations at 0.55x (times) P/B (price-to-book value) and continued strong downstream earnings at Novelis.

Expect re-rating on non LME drivers: Hindalco has corrected 17% from recent highs driven mostly by a “beta” sell-off seen in India over the last one month. In our view, the stock is attractively priced and offers investors decent risk-reward at current levels. Novelis (100%-owned downstream subsidiary) remains on a strong footing (the Q3 earnings miss was mostly driven by one-time issues) and volume growth should start as the new projects get ramped up (with the Pinda facility in Brazil among the big ones). The much-delayed

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