Hindalco Buy.

Investors may consider buying the Hindalco stock with a one- to two-year perspective. At its current price of Rs 172, the stock is trading at a multiple of about nine times its expected FY07 per-share earnings.

Hindalco has come out with a strong set of numbers for the June quarter. The highlight has been a strong rebound in its copper business. Higher capacity utilisation, coupled with a sharp recovery in treatment and refining charges (Tc/Rc), aided the copper division. Despite scheduled shutdown at one of its smelters, volume growth has been robust at 72 per cent. The spot Tc/Rc rates have contracted slightly on account of mining disruptions. However, contract Tc/Rc are likely to remain firm in the medium term, leaving scope for earnings expansion. The ramp up in copper production is likely to ensure higher volumes. This is also likely to buffer earnings from highly volatile prices. The overall outlook for copper business appears encouraging.

Hindalco’s aluminium business has also turned in an impressive performance. Firm aluminium prices and higher share of value-added products were factors behind the company’s strong numbers. Average realisations, which were higher by 35 per cent for aluminium and about 90 per cent for alumina on a YoY basis, helped in an over 10-percentage point expansion of the segment’s operating margins to 43.1 per cent. Alumina prices, which have nearly doubled over the last one year, are unlikely to sustain. Fresh supplies from China have already started flowing into the market. While this is expected to ease pressure on aluminium prices, higher demand and rising costs of fuel are likely to ensure that prices stabilise at higher levels. A superior product-mix, with value-added products currently contributing to 63 per cent of total output, is likely to place the company in a relatively comfortable position in the event of any cyclical downturn.

Hindalco has embarked on a series of brownfield and greenfield projects in alumina and aluminium. It expects these projects to commence operations in various stages starting December. This is likely to generate greater volumes and place Hindalco in a strong position to cater to the rising demand in the long term.