Hindalco - Upgrading to Neutral:: JPMorgan

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Hindalco Industries
▲ Neutral
Previous: Underweight
HALC.BO, HNDL IN
Upgrading to Neutral- Novelis & projects priced in,
further upside likely on sharp up move on Al prices



We upgrade HNDL to Neutral with a Mar12 PT of Rs245. We believe while
current valuations are pricing in Novelis improvement and timely
commissioning of greenfield projects, a further bullish aluminum price
environment (driven by QE2, China’s continued aluminum production cut
backs) is the key upside risk.


• Upgrading HNDL to N: Our UW call on HNDL has not worked given a)
stronger than expected aluminum price environment; b) Novelis
improvement which has been ahead of our estimates and continues to
surprise on the upside and lastly scarcity premium for HNDL given various
issues for peers. Going forward while on a relative basis, JPM house view is
that of aluminum prices underperforming, on an absolute basis, we forecast
prices to remain above $2350/MT (currently near $2460/MT), which should
result in continued strong aluminum earnings for HNDL. We expect
Novelis cash flow generation to remain robust (FY13E EBITDA at
$1.35bn). We upgrade HNDL to N with a revised March-12 PT of Rs245
(based on FY13 SOTP, and Utkal and Mahan at 70% utilization).

• Near term Aluminum price environment could take stock higher, even
though valuations stretched: As per JPM Global metals analyst Michael
Jansen, ‘the outlook for aluminum prices appears increasingly bifurcated;
maintenance or extension of power restrictions being price bullish, and a
reversal in availability of power, price bearish’. Hence while current
valuations at 7x FY12E EV/EBITDA on $2400/MT Al prices are stretched,
a continued bullish LME Al price environment (driven by QE2 and China
prod cuts) could further expand multiples. A $100/MT change in Al price
impacts our EPS estimates by 5%. Novelis’s operational performance has
improved and continues to surprise on the upside (please see, Novelis:
2QFY11 results broadly in line, published on Nov 11, 2010).

• Key downside risk other than collapse in AL prices is delays in projects:
While we expect production to start by FY13 on Utkal and Mahan projects,
given that H1FY11E capex stood at only Rs20bn against the project cost of
Rs140bn, we believe spending needs to pick up materially from here.