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Hindalco Industries (HALC.BO)
Buy: Novelis Sustains Performance, Target Price Upgraded
Raising TP, maintain Buy — We hike TP to Rs258 (from Rs210) and FY12 cons
PAT by 12% on higher LME prices/copper TC/RCs/EBITDA/t for Novelis (from
$325/t to $340/t) and lower interest costs. We roll forward from Sep11 to Mar12,
but continue to value Hindalco standalone at 8.5x P/E & other businesses at 7.5x
EV/EBITDA. Hindalco’s standalone value accounts for Rs125 (of Rs258) vs Rs99
(of Rs210) earlier. At our TP, it would trade at 7.5x FY12 EV/EBITDA and 12.6x
PE. Upside triggers: Continued LME increases and/or Mahan coal block approval.
Novelis: stable margins; offers downside protection — 1) Novelis has been
reporting strong quarterly trends in FY11 driven by strong demand across markets.
2) Its recent debt restructuring gives it flexibility to fund its own and the group’s
capex plans – it recently returned US$1.7bn to Hindalco. 3) Novelis’ capacity
should grow by 3-4% pa through FY14 (debottlenecking) and it has expansion
plans in Brazil and Asia. Based on the trends so far, Novelis feels its adj EBITDA
will cross $1bn (we estimate $1bn in FY11 & $1.05bn in FY12).
Aluminium: preferred metal — We expect it to trade in a range of US$2,400-
2,500/t through 2013. Two key issues will determine the outlook: (1) The
sustainability of inventory financing; (2) Curtailments of smelter output in China.
Hindalco: several growth plans — Hindalco is among the lowest-cost aluminium
smelters globally (capacity 500ktpa), well-integrated with captive power, bauxite
and 30% of its own coal. It plans to triple its smelter capacity to 1.6mtpa with
matching alumina/power of which 770ktpa (152% increase to 1.28mtpa) of smelter
capacity will be completed by 2HFY12 and the rest by 2015. As its coal block
remains uncertain, we have not assumed a reduction in power costs, but Hindalco
feels optimistic. Meanwhile it has applied for a tapering linkage.
Risks — Lower margins/volumes; Rupee appreciation; Lower import duties.
3QFY11 Results
Hindalco standalone results
3QFY11 PAT in line — Hindalco’s standalone PAT rose 8% yoy to Rs4.6bn
(3% below Citi estimate) on higher aluminium LME and copper byproduct
prices. PAT was adversely impacted by lower aluminium volumes (Hirakud
production disruption); lower copper volumes, TC/RCs; higher energy costs
and an appreciating rupee. EBITDA was flat yoy at Rs7.4bn.
Aluminium: good performance despite operational problems — EBIT
was 6% higher yoy and EBIT margin at 23.5% was in line with 3Q last year
(23.2%). This was largely driven by a 17% yoy rise in aluminium LME prices
($2,343/t vs $2,009/t). 3Q performance was adversely impacted by lower
metal production (-4% yoy to 136kt). The Hirakud smelter output had been
disrupted since early July due to pot outage caused by heavy rains/lightning
and led to output being impacted by ~9,000t. Restoration work has been
completed; operations stabilized in Jan11. Hindalco has a comprehensive
insurance policy covering property damage/business interruptions.
Copper: sequential improvement, but a difficult quarter — EBIT fell 10%
yoy to Rs1.4bn despite higher copper byproduct prices. Copper production
fell 10% yoy to 80,224t in 3Q. There was a production disruption at the
copper smelter due to the breakdown of the cooling tower of the sulphuric
acid plant. The division was also impacted by lower TC/RCs and higher
energy costs. The cooling tower has been restored and normal production
has resumed.
Novelis results
Novelis EBITDA/t up 9% yoy — Novelis’ 3QFY11 adj. EBITDA at $238m
(Citi est $245m) was up 20% yoy but 18% lower qoq. Volumes declined 2%
qoq to 751k tonnes as 3Q is seasonally weak but rose 10% yoy due to
strong demand across geographies. EBITDA/t improved to $317 vs. $291
last year but lower than $378 in 2QFY11. Though Novelis reported a net loss
of $46m, the adj. net profit was US$52m. The 9M adj. EBITDA was $791m
($344/t). Novelis is on track to meet its target of adj. EBITDA crossing $1bn
in FY11.
Strong demand across geographies in 3QFY11 — QoQ volumes were
lower due to seasonality: 1) lower beverage sales; 2) cold weather; 3)
holidays; and 4) scheduled maintenance shutdowns. However, on a yoy
basis, South America (15% of total shipments) had the strongest growth of
22%. Asia and Europe 50% of volumes) grew by 10% each yoy. Growth in
North America was muted at 5%. Management is quite positive on the longterm demand growth outlook: 3-4% for cans, 15% for auto, and 10% for
electronics.
Cost-saving initiatives — As a part of its cost reduction strategy, Novelis
has shut down one of its smelters in Brazil and is in the process of closing
down Bridgnorth (in Europe). Both these are underperforming assets and the
closures (closure cost $20m) should help improve EBITDA by ~$30m pa.
Novelis is continuing to focus on its recycling initiatives and plans to set up a
fully integrated used beverage can and scrap facility in Korea.
Other updates
Novelis balance sheet restructuring — Novelis has completed refinancing
transactions to recapitalize its balance sheet and give both Hindalco and
Novelis greater flexibility in financing capex and growth plans. Novelis has
raised $4.8bn of debt and returned $1.7bn to its parent, a wholly owned
subsidiary of Hindalco. The funds will be used to reduce overall group debt &
fund Hindalco’s expansion plans.
Coal uncertainty — Hindalco’s Mahan Coal Block is in a ‘No Go’ forest
area. However, Hindalco feels that the coal block approval will come through
as its projects are in advanced stages of implementation. Meanwhile, it has
applied for tapering linkage.
Projects on track — Hindalco (India) has plans to triple its alumina, power
and aluminium capacity to 4.5mtpa, 4,000MW and 1.6mtpa. 1) The 1.5mtpa,
Rs56bn Utkal Alumina project (Orissa) is expected to be completed by
4QFY12 and supply alumina to the smelters in MP and Orissa. 2) The two
smelters (359kt/900MW power/Rs92bn each) should be completed by
2HFY12. 3) In addition, a 1.5mtpa alumina refinery (in MP) and another
359kt smelter (in Jharkhand) are expected to be completed in 2014-2015. 4)
Hindalco is transferring equipment from Rogerstone, UK to Orissa. When
installed by 2QFY12, it will enable Hindalco to produce can body stock for
the domestic/export markets.
Hindalco Industries
Valuation
Our target price of Rs258 is based on SOTP. To value Hindalco standalone we
use a P/E of 8.5x on FY12 earnings, at the higher end of its trading range (6x to
10x) over the past five years. We use P/E because stocks such as Hindalco are
largely driven by commodity price trends, which translate into earnings
momentum. The multiple appears justified given our outlook of improving
aluminium prices and its position as a low-cost domestic producer. We value
Novelis and Hindalco's other businesses at 7.5x EV/EBITDA and we estimate
EBITDA/tonne of US$340 in FY12 and FY13. The valuation is at a small
premium to average global multiples, which range from 6x to 8x. We use
EV/EBITDA (rather than P/E) because Novelis has a high level of debt. At our
target price, Hindalco would trade at a consolidated FY12 EV/EBITDA of 7.5x
and P/E of 12.6x.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Hindalco shares, which we feel is
appropriate based on its low cost of production for aluminium, its strong
presence in the domestic market and its restructured debt-equity. Possible
upside risks to our target price include: 1) commodity prices (aluminum and
alumina) surpassing our forecasts; 2) copper TC/RC margins exceeding our
forecasts; 3) depreciation of the rupee; 4) Novelis' operational performance
surpassing forecasts; and 5) Increase in aluminium import duty. Downside risks
include: 1) commodity prices (aluminum and alumina) coming in below our
forecasts; 2) lower EBITDA/t (for Novelis) and lower volumes; 3) appreciation of
the rupee; 4) lowering of import duties
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HALC.BO)
Buy: Novelis Sustains Performance, Target Price Upgraded
Raising TP, maintain Buy — We hike TP to Rs258 (from Rs210) and FY12 cons
PAT by 12% on higher LME prices/copper TC/RCs/EBITDA/t for Novelis (from
$325/t to $340/t) and lower interest costs. We roll forward from Sep11 to Mar12,
but continue to value Hindalco standalone at 8.5x P/E & other businesses at 7.5x
EV/EBITDA. Hindalco’s standalone value accounts for Rs125 (of Rs258) vs Rs99
(of Rs210) earlier. At our TP, it would trade at 7.5x FY12 EV/EBITDA and 12.6x
PE. Upside triggers: Continued LME increases and/or Mahan coal block approval.
Novelis: stable margins; offers downside protection — 1) Novelis has been
reporting strong quarterly trends in FY11 driven by strong demand across markets.
2) Its recent debt restructuring gives it flexibility to fund its own and the group’s
capex plans – it recently returned US$1.7bn to Hindalco. 3) Novelis’ capacity
should grow by 3-4% pa through FY14 (debottlenecking) and it has expansion
plans in Brazil and Asia. Based on the trends so far, Novelis feels its adj EBITDA
will cross $1bn (we estimate $1bn in FY11 & $1.05bn in FY12).
Aluminium: preferred metal — We expect it to trade in a range of US$2,400-
2,500/t through 2013. Two key issues will determine the outlook: (1) The
sustainability of inventory financing; (2) Curtailments of smelter output in China.
Hindalco: several growth plans — Hindalco is among the lowest-cost aluminium
smelters globally (capacity 500ktpa), well-integrated with captive power, bauxite
and 30% of its own coal. It plans to triple its smelter capacity to 1.6mtpa with
matching alumina/power of which 770ktpa (152% increase to 1.28mtpa) of smelter
capacity will be completed by 2HFY12 and the rest by 2015. As its coal block
remains uncertain, we have not assumed a reduction in power costs, but Hindalco
feels optimistic. Meanwhile it has applied for a tapering linkage.
Risks — Lower margins/volumes; Rupee appreciation; Lower import duties.
3QFY11 Results
Hindalco standalone results
3QFY11 PAT in line — Hindalco’s standalone PAT rose 8% yoy to Rs4.6bn
(3% below Citi estimate) on higher aluminium LME and copper byproduct
prices. PAT was adversely impacted by lower aluminium volumes (Hirakud
production disruption); lower copper volumes, TC/RCs; higher energy costs
and an appreciating rupee. EBITDA was flat yoy at Rs7.4bn.
Aluminium: good performance despite operational problems — EBIT
was 6% higher yoy and EBIT margin at 23.5% was in line with 3Q last year
(23.2%). This was largely driven by a 17% yoy rise in aluminium LME prices
($2,343/t vs $2,009/t). 3Q performance was adversely impacted by lower
metal production (-4% yoy to 136kt). The Hirakud smelter output had been
disrupted since early July due to pot outage caused by heavy rains/lightning
and led to output being impacted by ~9,000t. Restoration work has been
completed; operations stabilized in Jan11. Hindalco has a comprehensive
insurance policy covering property damage/business interruptions.
Copper: sequential improvement, but a difficult quarter — EBIT fell 10%
yoy to Rs1.4bn despite higher copper byproduct prices. Copper production
fell 10% yoy to 80,224t in 3Q. There was a production disruption at the
copper smelter due to the breakdown of the cooling tower of the sulphuric
acid plant. The division was also impacted by lower TC/RCs and higher
energy costs. The cooling tower has been restored and normal production
has resumed.
Novelis results
Novelis EBITDA/t up 9% yoy — Novelis’ 3QFY11 adj. EBITDA at $238m
(Citi est $245m) was up 20% yoy but 18% lower qoq. Volumes declined 2%
qoq to 751k tonnes as 3Q is seasonally weak but rose 10% yoy due to
strong demand across geographies. EBITDA/t improved to $317 vs. $291
last year but lower than $378 in 2QFY11. Though Novelis reported a net loss
of $46m, the adj. net profit was US$52m. The 9M adj. EBITDA was $791m
($344/t). Novelis is on track to meet its target of adj. EBITDA crossing $1bn
in FY11.
Strong demand across geographies in 3QFY11 — QoQ volumes were
lower due to seasonality: 1) lower beverage sales; 2) cold weather; 3)
holidays; and 4) scheduled maintenance shutdowns. However, on a yoy
basis, South America (15% of total shipments) had the strongest growth of
22%. Asia and Europe 50% of volumes) grew by 10% each yoy. Growth in
North America was muted at 5%. Management is quite positive on the longterm demand growth outlook: 3-4% for cans, 15% for auto, and 10% for
electronics.
Cost-saving initiatives — As a part of its cost reduction strategy, Novelis
has shut down one of its smelters in Brazil and is in the process of closing
down Bridgnorth (in Europe). Both these are underperforming assets and the
closures (closure cost $20m) should help improve EBITDA by ~$30m pa.
Novelis is continuing to focus on its recycling initiatives and plans to set up a
fully integrated used beverage can and scrap facility in Korea.
Other updates
Novelis balance sheet restructuring — Novelis has completed refinancing
transactions to recapitalize its balance sheet and give both Hindalco and
Novelis greater flexibility in financing capex and growth plans. Novelis has
raised $4.8bn of debt and returned $1.7bn to its parent, a wholly owned
subsidiary of Hindalco. The funds will be used to reduce overall group debt &
fund Hindalco’s expansion plans.
Coal uncertainty — Hindalco’s Mahan Coal Block is in a ‘No Go’ forest
area. However, Hindalco feels that the coal block approval will come through
as its projects are in advanced stages of implementation. Meanwhile, it has
applied for tapering linkage.
Projects on track — Hindalco (India) has plans to triple its alumina, power
and aluminium capacity to 4.5mtpa, 4,000MW and 1.6mtpa. 1) The 1.5mtpa,
Rs56bn Utkal Alumina project (Orissa) is expected to be completed by
4QFY12 and supply alumina to the smelters in MP and Orissa. 2) The two
smelters (359kt/900MW power/Rs92bn each) should be completed by
2HFY12. 3) In addition, a 1.5mtpa alumina refinery (in MP) and another
359kt smelter (in Jharkhand) are expected to be completed in 2014-2015. 4)
Hindalco is transferring equipment from Rogerstone, UK to Orissa. When
installed by 2QFY12, it will enable Hindalco to produce can body stock for
the domestic/export markets.
Hindalco Industries
Valuation
Our target price of Rs258 is based on SOTP. To value Hindalco standalone we
use a P/E of 8.5x on FY12 earnings, at the higher end of its trading range (6x to
10x) over the past five years. We use P/E because stocks such as Hindalco are
largely driven by commodity price trends, which translate into earnings
momentum. The multiple appears justified given our outlook of improving
aluminium prices and its position as a low-cost domestic producer. We value
Novelis and Hindalco's other businesses at 7.5x EV/EBITDA and we estimate
EBITDA/tonne of US$340 in FY12 and FY13. The valuation is at a small
premium to average global multiples, which range from 6x to 8x. We use
EV/EBITDA (rather than P/E) because Novelis has a high level of debt. At our
target price, Hindalco would trade at a consolidated FY12 EV/EBITDA of 7.5x
and P/E of 12.6x.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Hindalco shares, which we feel is
appropriate based on its low cost of production for aluminium, its strong
presence in the domestic market and its restructured debt-equity. Possible
upside risks to our target price include: 1) commodity prices (aluminum and
alumina) surpassing our forecasts; 2) copper TC/RC margins exceeding our
forecasts; 3) depreciation of the rupee; 4) Novelis' operational performance
surpassing forecasts; and 5) Increase in aluminium import duty. Downside risks
include: 1) commodity prices (aluminum and alumina) coming in below our
forecasts; 2) lower EBITDA/t (for Novelis) and lower volumes; 3) appreciation of
the rupee; 4) lowering of import duties
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