InvestorZclub is recommending a buy on dips on Hindalco Industries in the region of Rs.130 to 135 for 1 year target return of at least 30%. Some of strong reasons for the recommendation are:
1. Trading at discount to current year FY 2012 Book Value. The FY-12 book value for the stock is expected to be Rs.165 while FY-13 book value should be at least Rs.175. The PE ratio for the current year is around 12 times.
2. The European subsidiary - Novelis which is cash positive but reports loss on net level is selling its loss making foil business in three countries which could bring it to green next year provided aluminium prices are supportive.
3. Copper inventory level in LME warehouses are at very low levels which should keep copper prices buoyant (See the charts below). Hindalco Industries is India's largest copper producer and produces around 3,40,000 tonnes of copper every year.
4. The US economy is showing very strong signs of pick up which should keep commodities buoyant while the news of china slowdown seems to be discounted in the metal prices specially aluminium which is down 20% since the start of 2012.
5. The stock seems to be taking strong support in 125 - 130 region. 52 week high low for the stock is 224 / 111.
Couple of concerns and risks ahead for the stock and the company are:
1. High Aluminium inventory levels in LME warehouses (See the charts below) could put further pressure on Aluminium which could in turn affect the company's profitability going forward. But better than expected recovery in US and rate cycle reversal in India, which could in turn increase demand for cars (large consumer of Aluminium), should help in supporting the price which is already down 20% since Jan 2012.
2. Sudden problem in European region could affect the demand for the products that Novelis make. As a result of which the numbers might turn bad for Hindalco Industries on consolidated basis.