Though the Kotak report warns that the macro environment is not entirely in favour of aluminium stocks, which is compounded by concerns on the green-field project for Hindalco, it is bullish on the stock in the short-term. It sees a healthy growth in earnings and the prevailing attractive valuations.

Kotak forecasts a 15 per cent rise in earnings growth in fiscal 1999 for Hindalco, driven by a 16 per cent volume growth, superior productmix and cost efficiencies. Kotak's forecast is supported by lower domestic supply on account of Nalco's production disruptions which are likely to continue until December.

In terms of valuations, says the brokerage, Hindalco is currently at a 37 per cent discount to the BSE sensex multiple. Hindalco is currently hovering around Rs 460 (as on Monday), though Kotak's valuations are based on a price of Rs 437 as on August 31. Though Kotak concedes that macro factors are not in favour of Hindalco, it points out that the impact of these on its earning power may have been overdone. ``We maintain a market outperformer on the stock though we will closely monitor the impact of continuing negative developments outside India,'' says the report.

Kotak, however, is concerned about thw wider effects of the economic problems in Russia. ``Russia has been a large net exporter of aluminium to the West, mainly the US and the Europe (which together account for over 50 per cent of the world consumption).''

Kotak sees thekey to aluminium demand in the impact the Asian, Japanese and Russian economic developments will have on the US and European demand for the metal. In 1997, Russia produced 2.9 million tonnes or 13 per cent of global aluminium production. It exported 2.46 million tonnes (about 85 per cent of production to the West. For the first half of 1998, Russian aluminium production appears to have risen 3.4 per cent to about 1.48 million tonnes with the largest production increases coming from Russia's giant Siberian smelter Bratsk and Krasnoyarks, each capable of approximately 800,000 tonnes of annual production.

Russia has been increasing its production of domestic alumina (the raw material ingredient to produce aluminium). But the country is compelled to import more than 70 per cent of its alumina requirements despite the fact that it produces bauxite domestically, says the report.

However, Kotak sees some positive developments in the global market. A stable demand growth in the key consuming markets of US andEurope, rleatively balanced global market and low inventory situation. ``We are looking for a relatively balanced global market currently and do not expect the Russian situaation to immediately upset the balance.'' Inventory position is also strong at around eight weeks consumption against the 1995 peak of over 15 weeks. This is likely to result in support for the prices from shipment orders at the end of the current seasonally-weak demand period.

``Another source of concern is China,'' says Kotak. China is a net importer of both alumina and aluminium and accounts for about 10 per cent of the global aluminium consumption. Any slowdown in Chinese consumption can further upset the metals market balance.