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India - HINDALCO
Improving aluminium prices
We upgrade FY12-13CL EPS by 9-12%. Maintain BUY.
We upgrade Hindalco’s FY12-13CL EPS by 9-12%, factoring in higher
aluminium-price forecasts from our resources team, increased interest
costs from Novelis’ debt refinancing and greater power costs in FY13 given
risks to the Mahan coal block. We continue to like Hindalco given our belief
in an eventual two-year value of more than Rs350 for the stock once new
capacity is fully ramped up. While we expect to spells of underperformance,
such as now, we would view such periods as an opportunity to BUY.
Rising aluminium prices. A combination of cost push due to rising
alumina prices and power tariffs in China, production cutbacks in China,
renminbi appreciation and expectation for the start of aluminium ETFs
have boosted LME aluminium prices in recent months despite continued
high inventory levels. Our resources team has upgraded the aluminium
price forecasts by about 10% over CY11-12CL to US$2,425-2,535/tonne -
inline with spot prices.
Novelis debt refinancing. Novelis has replaced the US$2.5bn debt on its
balance sheet with a new US$4.0bn debt. Of this, US$1bn has gone
towards repaying the US$1bn acquisition loan lying in the 100% Hindalcoowned special purpose vehicle (SPV) that owns Novelis while US$700m
has been paid as dividend to Hindalco (HNDL IB - Rs233.2 - BUY). As per
the covenants of the old debt, Novelis had restrictions on capital
investment and dividend payment, which will not exist now. This will
however come at the cost of a slightly higher interest rate (about 8.5%).
The interest in the SPV loan was previously being treated as a project cost
and was being capitalised but will now be expensed in Novelis’ P&L.
What we worry about? - Delays and coal. While Hindalco’s management
continues to guide for timely commissioning of the three Greenfield projects,
we have assumed a delay of six months in all. The Utkal Alumina refinery
and the Mahan smelter might get commissioned on time but we see risk of
higher delays in the Aditya smelter. The coal block in the Mahan smelter falls
under the Ministry of Environment and Forest’s “No Go” area and there is no
clarity yet on whether this clause will be relaxed. Hindalco has applied for a
coal linkage for this smelter but given Coal India’s production woes (again
thanks to the MoEF), we are sceptical of full supply of linkage coal and don’t
rule out Hindalco having to import some coal.
Upgrade estimates by 9-12%; maintain BUY. Hindalco was the bestperforming metal stock in 2010. While there might be a spell of
underperformance if the company announces delays mid-year, we would
remain positive given our view that delays will now be in months and not
years. We maintain our BUY call with a revised FY13-based sum-of-theparts target price of Rs280.
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