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Hindalco Industries Limited
Growth for the ‘future’
Investment rationale
High visibility on India expansions
Expansion projects of Hindalco Industries Limited (HNDL) are on schedule,
thereby increasing its leverage to high margin Indian markets. Refining capacity
in India will double by FY12e while smelting capacity will grow by 140%.
Thus, the business portfolio will become more stable and aligned with end-toend
value chain transforming Hindalco to a different league.
Novelis' sustainable restructuring
The restructuring of Novelis and efficiency improvements are yielding strong
operating performance. The company’s efforts are directed towards improving
and sustaining the performance by shutting down unprofitable and low margin
operations. The debottlenecking of existing 3mtpa capacity at ~3% every
year till FY14e and 220kt Brazil expansion in FY13e will increase the exposure
towards growing markets and premium products.
Financial reengineering will reflect in balance sheet strength
HNDL's consolidated gross debt at USD6bn has been restructured with
acquisition debt transferred to Novelis while the Indian arm will do the equity
financing for expansions. Henceforth, Novelis will bear USD4.8bn debt while
HNDL's capex will be on a 70:30 debt:equity ratio on a project basis through
SPV structure. Despite funding USD2.7bn equity required for new projects,
Novelis' improving cash flows and surplus cash will see net debt/EBITDA
within comfortable 2x levels.
Valuation and outlook
The stock is currently trading at 11.2x FY12e EPS and 6.8x FY12 EV/EBITDA.
Majority of the capital work in progress will become operational by FY12e
end, and thereby, FY13e is likely to witness stronger cash flows and profitability
with higher scale of operations. The high predictability of the capex project
completions and back-ended cash flows has prompted us to base our target
price by allocating 25% and 75% weightage to FY12e and FY13e, respectively.
We reiterate a BUY with a target price of INR279 per share.
Investment rationale
Capacity expansion on schedule
The smelter expansion project (from 155ktpa to 161ktpa) is nearing completion,16 of
28 pots are in operation, the balance to be taken in line soon. A further expansion,
from 161ktpa to 213ktpa, along with a 100MW power plant will be completed by
4QFY12e. The visibility on expansion plans related to Hirakud, Utkal, Mahan, Aditya
Aluminium and Alumina and Jharkhand are on track with improving visibility every
subsequent quarter.
The management believes the global system of linking alumina prices to aluminium
(12.5% to 14%) is set for a break down. Thus, standalone smelters will have tough
time as alumina prices will have free pricing function and move towards copper TcRc
way offering huge advantages to integrated operations of Hindalco. The company
aims to have a cash cost of ~USD100 for alumina, a marked discount to the global
range of USD150-200, while cash cost of aluminium will be ~USD950-1,050, which
is one of the lowest.
The equity funding of Utkal (INR70bn) and Mahan (INR92bn) will be done through
existing cash in the balance sheet. Also, when Aditya moves to the capex mode
(INR92bn), the debt will not move beyond 1:1.
Valuation and outlook
The stock is currently trading at 11.2x FY12e EPS and 6.8x FY12 EV/EBITDA. We
believe that sustained uptrend in operations of Novelis, robust domestic operations
with rising volumes coupled with enhanced costing and operational efficiency augurs
well for the company in a volatile macro environment.
Structural stability in aluminium prices globally along with operating metrics can be
rated amongst the top deciles globally. The growth traction offers potential to capitalise
on both scale and value chain expansions fruitfully.
Majority of the capital work in progress will become operational by FY12e end, and
thereby, FY13e is likely to witness stronger cash flows and profitability with higher scale
of operations. The high predictability of the capex project completions and backended
cash flows has prompted us to base our target price by allocating 25% and 75%
weightage to FY12e and FY13e, respectively. We reiterate a BUY on this stock with a
target price of INR279 per share providing an upside of 16% from the current levels.
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