Switch from Hindalco to Nalco

Hindalco , CMP- ` 76, Market cap- ` 158 bn

Nalco (National Aluminium co.), CMP- ` 32, Market cap- ` 8.5bn

Nalco

We believe that Nalco is very much near to bottom as we believe that downside is limited to ` 3 from current level but upside can be ` 8 from the current level. The soft coal prices is helping Nalco as its power cost has come down significantly by 10%. The power cost constitute 40-45% of the total cost of aluminium production. Besides, company is debt free and has net cash of about ` 4 bn. For Q1FY16, it registered revenue of ` 1.49bn ,EBIDTA of ` 2bn and PAT of ` 1.6bn and EPS of ` 0.6. It paid dividend of ` 1.25 for FY15

Hindalco

We believe that stock is not yet near its bottom and there can be significant downside of about 20% to level of ` 60 from the current level. Besides, it has incurred huge debt of about ` 290bn on standalone basis and ` 680bn on consolidated basis for the ongoing capex in Mahan, Utkal and at Novelis. For FY15, it registered consolidated revenue of ` 1,042bn, EBIDTA of ` 89bn and PAT of ` 8.5bn. For FY15 on standalone basis, it registered revenues of ` 345bn, EBIDTA of ` 34bn and PAT of ` 9.2bn. For Q1FY16, it registered Standalone revenue ` 85bn, EBIDTA of ` 8.7bn and PAT of ` 1,072mn. We are of the view that continuing growth decline in China will keep aluminium prices under pressure and it will pose huge challenges for the company in debt servicing as its standalone Net debt to EBIDTA can increase to 10x which can trigger breach of debt covenants.