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Hindalco
Utkal and Mahan expansions to hit in FY12
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways…
„Utkal and Mahan expansions to kick in in FY12
1.5mtpa Utkal alumina expansion and 359ktpa Mahan Al smelter expansion are
expected to be commissioned in FY12. A few months delay vs earlier timelines is
possible. Mahan coal block issue is unresolved (falls in “No Go” area as per
MoEF), but HNDL has applied for a coal linkage to meet requirements in case
there are delays in the resolution of the issue. Forest clearance stage II is pending
for Aditya project. Expected ramp-up time for smelter is 15 months and for
refinery is 18 months. HNDL expects Al production cash cost to be ~US$1100/t
post ramp-up.
Novelis: capacity to increase by 600kt by FY14
Novelis expects de-bottlenecking to drive 3-4% volume growth. Also, 220ktpa
Pinda expansion should contribute to volume growth. It expects the current
adjusted EBITDA run rate of US$1.1bn per annum to be sustainable. Also, the
focus on high-margin products like autos could also contribute to further
improvement in the medium term.
Capex plans of US$3bn-plus over next 18 months
Total capex for the Al expansion is US$5.2bn. About 40% of capex has been spent
up until 1H FY11 (1H FY11 ~US$900mn). HNDL plans to spend US$1.5bn in FY11
and US$2.2bn in FY12. It expects to achieve financial closure for the Mahan Project
soon. Novelis debt refinancing improves its balance sheet flexibility, as Novelis has
raised US$4bn to refinance its existing debt. This was used to 1) repay SPV debt of
US$1bn, and 2) distribute US$700mn as return of capital to HNDL. The refinancing
(albeit at a higher cost) eases some of covenants/restrictions and improves flexibility
to upstream Novelis’s cash flow to HNDL.
Price objective basis & risk
Hindalco (HNDFF)
Our PO of Rs250 is based on our NPV valuation.
We assume a WACC of 12.5% and perpetuity growth of 0%. Our DCF currently
assumes aluminum prices of US$2195/t in FY11E, US$2281/t in FY12E and long
term price of US$2271/t.At our PO Hindalco trades at 6.5x FY11e EBITDA.
Upside risks: Higher aluminum and copper prices due to recovery in demand and
production cuts in aluminum.
Downside risks: Lower aluminum prices, execution risks and delays in capacity expansion.
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