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ICICI Securities Report
While long-term can be argued for in Hindalco Industries Ltd., the medium-term (~ one year) uncertainties are too staggering to ignore. There is an overhang of possible Indian export duty on aluminium.
The cost pressures in domestic aluminium business are leading to earnings downgrade. Novelis Ebitda sits precariously at $500/tonne when the U.S. has started hinting on removing of duties on China; a reciprocation will lead to China removing 25% import duty on U.S. scrap, leading to a collapse in scrap London Metal Exchange spreads.
Also, weakening U.S. housing/construction market will have a direct impact on specialies volumes – Aleris acquisition success has been largely driven by increased volumes and spreads of the specialties portfolio.
The earnings and the return on equity profile of Hindalco would look very different with Novelis spreads at $400/te as against $500/tonne at present. Further, the increase in capex is not allowing any deleveraging.
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