Hindalco Industries- Focussing on profitable growth:: Macquarie Research,

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Hindalco Industries
Focussing on profitable growth
Event
 Hindalco is Asia's largest integrated primary producer of aluminium and
the world's largest aluminium rolling company. Its Indian aluminium operations
are fully integrated, with primary aluminium capacity of nearly 0.5mtpa and
copper cathode capacity of 0.5mtpa.
 The company’s Novelis operation in the United States comprises 3mt of
rolling facilities. The company is expanding its rolling capacity by setting up a
300kt rolling facility in Brazil.

Impact
 Sales mix leveraged to developed world: About 66% of Hindalco’s sales
are from its Novelis operations, and the rest is from the Indian aluminium and
copper business. However, the contribution in earnings is skewed more
toward the Indian operations. We expect Hindalco to earn about US$1.6bn of
EBITDA in FY11, with the domestic business contributing about 37% of this
and Novelis about 54%. We expect the remaining 9% of profits to come from
the company’s subsidiary, Aditya Birla Minerals.
 Hindalco – focussing on profitable growth: Hindalco expects to triple its
aluminium facility, which is integrated for alumina and bauxite, in the next
three to four years. The company has been allocated a bauxite mine (300mt
reserves) and a coal mine (250mt reserves) for its projects. Full integration
will make Hindalco one of the lowest cost producers of aluminium globally.
 Capex and funding: Hindalco is spending US$8bn in capex on its India
business. It has already invested a large part of its equity contribution and
holds the remaining amount in cash. The debt funding for the capex is also
largely in place.
 Novelis – turned around and now on a growth path: Hindalco has turned
around Novelis faster by cutting costs and replacing old contracts with new
contracts, with better margins built in and with costs passed through. Novelis,
in fact, has now announced it will expand capacity by 10% in the next two
years. Management guidance for FY11 EBITDA is US$1bn.
Action and recommendation
 A spurt in aluminium prices should help Hindalco earnings in the short run.
The stock is currently trading at a 10x PER on FY12E.


Hindalco Industries Aide Memoire
Operational issues
India – Aluminium business
1. What is the current cost of production? How much coal is bought under linkage and what portion under e-auction? What is
the price difference?
2. How much aluminium is sold as value added? What premium do you get because of value addition? Are the prices of
value-added products more stable than prices of pure metal? How will the closure of the alloy wheels plant change this?
Why is this plant being closed if value addition is the key to better prices?
3. What is the capex schedule? What is the debt:equity proposed for these projects? How much capex has been spent? Have
you tied up any debt for these projects? How much is already availed?
India – Copper business
1. What is the gross cash cost of production? What is the by-product credit available? Do you receive any premium for value
adding copper metal?
2. What is the mix of spot and contract TC/RC's? What is current spot TC/RC's? How much of your contract TC/RC's are
longer than one year? At what TC/RC's have you contracted from your 51% subsidiary, Aditya Birla Mineral Resources,
which has a mine in Australia?
3. What are the plans for this business?
Novelis
1. What is the sustainable EBITDA per ton margin for Novelis? What is the underlying EBITDA for the last two quarters?
What are the initiatives currently being planned for cost reduction? How much improvement in EBITDA per ton is
expected?
2. What changes are you making to your risk management policy to better protect the conversion margins in this business?
3. How is demand shaping up in the European market?
4. What are the plans to introduce these high-end products to India and other developing markets?
5. What happened to the hyped Fusion technology? Any new developments?
6. What is the current debt on Novelis’ books? What is the repayment schedule? When will Novelis be debt free? Are there
any capex plans for this business?
Funding issues
1. What is the current overall debt, and what is the debt:equity ratio you feel comfortable with? What are the new covenants in
the refinanced Novelis debt facilities?
2. What is promoter holding? What level of dilution is expected?
Strategic issues
1. What expansion plans are underway? What is the status of the bauxite and coal linkages?
2. How serious is the naxal threat to these expansions?
3. What are the commissioning schedules?