Kotak stays cautious on Hindalco Industries; here’s why

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Published: June 18, 2016 6:15:26 AM

Hindalco’s run-up of over 30% during the past month reflects the Street’s optimism on declining costs and accelerated EBITDA growth at Novelis.

Hindalco’s run-up of over 30% during the past month reflects the Street’s optimism on declining costs and accelerated EBITDA growth at Novelis.

In addition, a deficit in global aluminum markets in recent months on weak China output has fueled expectations on the pricing front too. But aluminum markets will likely fall back to surplus in 2HCY16 due to restarts and new projects in China.

The unwinding of large aluminum inventories poses an equal pricing risk. EBITDA margins at Novelis’ South America operations appear high and unsustainable. We stay cautious.

We expect global aluminum markets to fall back to surplus from a deficit in 2QCY16 due to capacity restarts and new project ramp-ups in China.

The global aluminum markets were in deficit of 800 kt in 2QCY16 due to– seasonally stronger demand in China in 2QCY16 (post holidays) and weaker production after few smelters closed in end-CY2015.

Of the closed smelters, about 1.47 mtpa have already restarted after some recovery in China aluminum prices (+20%) over the past 6 months. The restarts are gradual and only limited volumes were reported in 2QCY16.

Moreover, additional 2.5 million tons of volumes are expected in China from new projects in 2HCY16—higher volumes will lead to surplus aluminum markets in 2HCY16.

We expect global aluminum market surplus of 416 kt in CY2016 due to China surplus of 1.9 million tons partially offset by world ex-China deficit of 1.5 million tonne.

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