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�� Results below expectations, led by above estimated cost
Hindalco Industries (standalone) reported Q3FY11 net revenue of INR 59.7 bn,
above our estimate of INR 58.2 bn. EBITDA, at INR 7.4 bn, was below our
estimate of INR 8.3 bn, led by higher raw material costs (largely carbon
consumables) and one-time cost of INR 1 bn due to Hirakud and Dahej outages.
Thus, PAT came in at INR 4.6 bn, lower than our estimate of INR 5.4 bn. Losses
due to these outages could be partly offset by insurance claims.
�� Aluminium business: PBIT up 10% Q-o-Q
While aluminium production was up 10% Q-o-Q, proportion of value-added
products (VAP) decreased from 52% in Q2FY11 to 41% in Q3FY11 due to lower
metal supply from Hirakud. PBIT, at INR 4.6 bn, rose 10% Q-o-Q, despite ~9 kt
loss in production at Hirakud which is now fully restored.
�� Copper business: PBIT up 11% Q-o-Q
Though copper production is down 15%, PBIT is up 11%, Q-o-Q. We believe this
could be due to better spot TcRc and higher by-product prices. The company has
restarted full operations at Dahej (copper operations).
�� Aditya and Utkal projects delayed; Aditya delay a negative surprise
The 1.5 mt Utkal refinery expansion has been delayed by a quarter and is now
expected by early 2012 (our assumption March 2012). Mahan smelter is now
expected to be commissioned by October 2011 (our assumption March 2012),
while completion of Aditya smelter is deferred to 2012 end. Delay in Aditya
smelter is a negative surprise and is due to late receipt of forest clearance. We
are not assuming any production from these projects in FY12.
�� Outlook and valuations: Project delays a concern; maintain ‘BUY’
We are keeping our consolidated FY11 estimates largely unchanged, as lower
earnings in the standalone business is likely to be offset by higher-thanestimated
earnings in Novelis and ABML (captive copper). We retain our FY12
estimates and introduce FY13 numbers. For FY13, we assume capacity utilisation
of 70% and 50%, respectively, for Utkal and Mahan projects; for Mahan, we
assume e-Auction coal usage (no captive coal due to ‘NO GO’ area) and estimate
aluminium price at USD 2,700/t. EBITDA for FY13E is up ~31% Y-o-Y. We
maintain ‘BUY/Sector Outperformer’ recommendation/rating on Hindalco,
with a fair valuation of INR 291.
�� Operational performance
Aluminium production is up 10% Q-o-Q as production was affected in Q2FY11 due to
power outage. Normalcy has been restored at the affected Hirakud smelter gradually and
fully in January 2011. Copper production was down 15% Q-o-Q due to breakdown in
cooling tower of sulphuric acid plant in November 2010 which affected smelter
production. Production also has been fully restarted at copper facility after only 17 days
of outage.
�� Company Description
Hindalco is one of the largest aluminium producers in India with 514,000 tonnes of
upstream aluminium facility/capacity and backward linkage in alumina (1.5 mtpa) and
bauxite (reserves of 65 mn tonnes). It also operates India’s largest copper smelter with
a capacity of 500,000 tonnes at Dahej with a captive power plant, jetty, and ~20-25%
backward linkage in copper concentrate through Aditya Birla Mineral (a 51% subsidiary).
In February 2007, Hindalco acquired Novelis, a 3.4 mtpa aluminium rolled-products
producer, for enterprise value of USD 6.1 bn. Novelis has 33 operating plants and 3
research facilities in 11 countries, across 4 continents. The company is in expansion
mode and plans to increase its alumina capacity five-fold to 5.0 mtpa (from 1.5 mtpa
currently) and aluminium capacity to 1.7 mtpa, with total capital outlay of INR 407.5 bn
in the next five years. The green field phases of these projects, which are back-ended,
will only come on stream starting FY12E.
�� Investment Theme
We have a positive outlook on aluminium led by strongly increasing demand. Hindalco’s
standalone business is robust with competitive cost of producing aluminium (~USD
1,550/tonne currently) and value-added aluminium products, which constitute over 50%
of the volume mix. The company manufactures special grade alumina that commands a
premium of up to ~USD 250/tonne over the regular variety. We expect margin
expansion in Novelis due to overall recovery in developed markets and aluminium.
Novelis is likely to benefit once the impact of metal price ceiling contract expires in
December 2009.
�� Key Risks
• Higher- than- expected increase in input costs.
• Lower –than- expected margin expansion at Novelis.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Results below expectations, led by above estimated cost
Hindalco Industries (standalone) reported Q3FY11 net revenue of INR 59.7 bn,
above our estimate of INR 58.2 bn. EBITDA, at INR 7.4 bn, was below our
estimate of INR 8.3 bn, led by higher raw material costs (largely carbon
consumables) and one-time cost of INR 1 bn due to Hirakud and Dahej outages.
Thus, PAT came in at INR 4.6 bn, lower than our estimate of INR 5.4 bn. Losses
due to these outages could be partly offset by insurance claims.
�� Aluminium business: PBIT up 10% Q-o-Q
While aluminium production was up 10% Q-o-Q, proportion of value-added
products (VAP) decreased from 52% in Q2FY11 to 41% in Q3FY11 due to lower
metal supply from Hirakud. PBIT, at INR 4.6 bn, rose 10% Q-o-Q, despite ~9 kt
loss in production at Hirakud which is now fully restored.
�� Copper business: PBIT up 11% Q-o-Q
Though copper production is down 15%, PBIT is up 11%, Q-o-Q. We believe this
could be due to better spot TcRc and higher by-product prices. The company has
restarted full operations at Dahej (copper operations).
�� Aditya and Utkal projects delayed; Aditya delay a negative surprise
The 1.5 mt Utkal refinery expansion has been delayed by a quarter and is now
expected by early 2012 (our assumption March 2012). Mahan smelter is now
expected to be commissioned by October 2011 (our assumption March 2012),
while completion of Aditya smelter is deferred to 2012 end. Delay in Aditya
smelter is a negative surprise and is due to late receipt of forest clearance. We
are not assuming any production from these projects in FY12.
�� Outlook and valuations: Project delays a concern; maintain ‘BUY’
We are keeping our consolidated FY11 estimates largely unchanged, as lower
earnings in the standalone business is likely to be offset by higher-thanestimated
earnings in Novelis and ABML (captive copper). We retain our FY12
estimates and introduce FY13 numbers. For FY13, we assume capacity utilisation
of 70% and 50%, respectively, for Utkal and Mahan projects; for Mahan, we
assume e-Auction coal usage (no captive coal due to ‘NO GO’ area) and estimate
aluminium price at USD 2,700/t. EBITDA for FY13E is up ~31% Y-o-Y. We
maintain ‘BUY/Sector Outperformer’ recommendation/rating on Hindalco,
with a fair valuation of INR 291.
�� Operational performance
Aluminium production is up 10% Q-o-Q as production was affected in Q2FY11 due to
power outage. Normalcy has been restored at the affected Hirakud smelter gradually and
fully in January 2011. Copper production was down 15% Q-o-Q due to breakdown in
cooling tower of sulphuric acid plant in November 2010 which affected smelter
production. Production also has been fully restarted at copper facility after only 17 days
of outage.
�� Company Description
Hindalco is one of the largest aluminium producers in India with 514,000 tonnes of
upstream aluminium facility/capacity and backward linkage in alumina (1.5 mtpa) and
bauxite (reserves of 65 mn tonnes). It also operates India’s largest copper smelter with
a capacity of 500,000 tonnes at Dahej with a captive power plant, jetty, and ~20-25%
backward linkage in copper concentrate through Aditya Birla Mineral (a 51% subsidiary).
In February 2007, Hindalco acquired Novelis, a 3.4 mtpa aluminium rolled-products
producer, for enterprise value of USD 6.1 bn. Novelis has 33 operating plants and 3
research facilities in 11 countries, across 4 continents. The company is in expansion
mode and plans to increase its alumina capacity five-fold to 5.0 mtpa (from 1.5 mtpa
currently) and aluminium capacity to 1.7 mtpa, with total capital outlay of INR 407.5 bn
in the next five years. The green field phases of these projects, which are back-ended,
will only come on stream starting FY12E.
�� Investment Theme
We have a positive outlook on aluminium led by strongly increasing demand. Hindalco’s
standalone business is robust with competitive cost of producing aluminium (~USD
1,550/tonne currently) and value-added aluminium products, which constitute over 50%
of the volume mix. The company manufactures special grade alumina that commands a
premium of up to ~USD 250/tonne over the regular variety. We expect margin
expansion in Novelis due to overall recovery in developed markets and aluminium.
Novelis is likely to benefit once the impact of metal price ceiling contract expires in
December 2009.
�� Key Risks
• Higher- than- expected increase in input costs.
• Lower –than- expected margin expansion at Novelis.
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