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Hindalco Industries (HNDL)
Metals & Mining
Weak quarter; greenfield projects delayed further. Hindalco’s 3QFY11 EBITDA of
Rs7.4 bn, was 14.4% lower than our estimate and impacted by (1) cost pressures; (2)
lower-than-expected production of metal and VAP. Hindalco announced a 9-12 month
delay in commissioning several greenfield projects. The delays are a negative but we see
sufficient catalysts in the form of volume growth, VAP expansion and a likely increase in
profitability of Novels to drive stock performance. ADD.
Weak quarter; COP increases further
Hindalco’s reported 3QFY11 EBITDA of Rs7.4 bn (+6% qoq, -1% yoy) was 14.4% lower than our
estimate. Net income of Rs4.6 bn (+6.1% qoq, +7.8% yoy) was 18.1% lower than our estimate.
We attribute the earnings miss to (1) lower-than-expected metal production and sales. Primary
metal production missed our estimate by 6 kt and copper by 8 kt. Value-added product mix was
also weak; and (2) significant increase in cost of production on account of increase in CP coke,
furnace oil and coal prices and expenses associated with stabilization of Hirakud smelter after
disruptions in the previous quarter. The management quantified the cumulative impact of the cost
increase and disruptions at Rs1 bn for the aluminium business segment.
9-12 month delay in greenfield projects
Hindalco announced a nine-month delay in commissioning of Utkal Alumina refinery (revised
schedule of early 2012) and about a year to end-2012 for Aditya Aluminium smelter. The company
retained its commissioning target of Oct 2011 for the Mahan Aluminium smelter. The extent of
delay in the Utkal Alumina refinery is surprising noting that the company had achieved financial
closure and was in advanced stage of construction. Given that it takes about 12-18 months to
stabilize an alumina refinery, full alumina production from Utkal will be available only in FY2014.
Delays imply that greenfield project-led-growth will shift to FY2014 from FY2013 earlier.
Sufficient catalysts despite delays, Retain ADD rating
We lower aluminium metal volumes for FY2013E by 36.6% to 688 kt on account of the delay in
commissioning greenfield projects. Despite the delay, we believe there are sufficient catalysts for
stock performance, including (1) brownfield expansion of Hirakud smelter to 213 ktpa by end-
FY2012E from 155 ktpa; (2) Hirakud FRP project which may be commissioned by end-FY2012E;
(3) volume expansion and profitability improvement through mix change in Novelis. We retain our
FY2011E and FY2012E EPS of Rs14.9 and Rs16.9, respectively. However, we lower our FY2013E
EPS estimate by 13.8% to Rs18.6 on the back of delay in commissioning of greenfield projects.
We retain our ADD rating with a revised end-FY2012E fair value of Rs250/ share (Rs255/ share
earlier).
Key changes to our estimates
We revise our FY2011E, FY2012E and FY2013E EPS estimate to Rs14.9, Rs16.9 and Rs18.6,
from Rs15, Rs16.9 and Rs21.5. We increase our FY2011E and FY2012E EBITDA estimate by
7.7% and 3.4% to Rs87 bn and Rs88.3 bn, respectively, while we lower our FY2013E
EBITDA estimate by 19.1% to Rs 94.4 bn. The following factors drive our estimates change:
�� We model revised aluminium price of US$2,210, US$2,250 and US$2,300 for FY2011E,
FY2012E and FY2013E versus US$2,050 US$2.150 and US$2,300 earlier. The revision is
largely on account of cost-push factors driving up cost of production of aluminium
globally
�� We lower aluminium metal production to 572 kt and 688 kt for FY2012E and FY2013E
versus 603 kt and 1,085 kt earlier. We also lower alumina production by 3% and 29% to
1,425 kt and 1800kt for FY2012E and FY2013E, respectively. We model lower production
from Mahan Smelter and from Utkal Alumina in FY2013E. We assume that Aditya
Aluminium smelter will be commissioned only in FY2014E
�� We incorporate KIE economist’s revised Re/US$ forecast of Rs45.6, Rs45.5 and Rs44 for
FY2011E, FY2012E and FY2013E versus Rs45.5, Rs44.5 and Rs44.1 earlier
Mahan Aluminium smelter—Hindalco applies for temporary coal linkage
Hindalco has applied to the Ministry of Coal for tapering linkage for the Mahan captive
power plant (CPP) until the company’s own mines commence operations. Hindalco’s coal
block (Mahan coal block to be jointly developed by Essar and Hindalco) in Madhya Pradesh,
has been included in the “No Go” zone; as a result forest advisory committee has not given
its decision on forest clearance for the coal block. We believe that Hindalco’s COP from
Mahan smelter may increase by US$200-400/ ton if it relies on linkage-imported coal from
the originally envisaged plan
Hindalco has appointed bankers for launching Rupee term-loan syndication for achieving
financial closure for the Mahan project
Results analysis
Aluminium business segment performance impacted by lower production
Hindalco’s aluminium segment reported net revenues of Rs19.8 bn (+3.5% qoq, +4.9% yoy),
9.7% lower than our estimate of Rs21.9 bn. Realization of US$3,244/ ton was 5.7% lower
than our estimate. Contribution from value-added products declined to 40.8% of total
production (51.6% in 2QFY11) and contributed to the earnings miss. Aluminium EBIT
increased 9.7% qoq and 6.1% yoy primarily on the back of higher realizations. Note that
the decline in value-added products, increase in cost of raw materials and costs associated
with stabilization of Hirakud plant neutralized a fair bit of aluminium price increase
Copper business segment—steady performance
Copper EBIT declined 10.3% yoy to Rs1.4 bn, 10.4% below our estimates. Production of
80K tons was lower than expected. Refined copper production was impacted by breakdown
of cooling tower at Dahej. The recent increase in Tc/Rc to 20c/lb bodes well; we believe that
annual Tc/Rc contracts may settle at 17c/lb versus 12/c/lb in 2010.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HNDL)
Metals & Mining
Weak quarter; greenfield projects delayed further. Hindalco’s 3QFY11 EBITDA of
Rs7.4 bn, was 14.4% lower than our estimate and impacted by (1) cost pressures; (2)
lower-than-expected production of metal and VAP. Hindalco announced a 9-12 month
delay in commissioning several greenfield projects. The delays are a negative but we see
sufficient catalysts in the form of volume growth, VAP expansion and a likely increase in
profitability of Novels to drive stock performance. ADD.
Weak quarter; COP increases further
Hindalco’s reported 3QFY11 EBITDA of Rs7.4 bn (+6% qoq, -1% yoy) was 14.4% lower than our
estimate. Net income of Rs4.6 bn (+6.1% qoq, +7.8% yoy) was 18.1% lower than our estimate.
We attribute the earnings miss to (1) lower-than-expected metal production and sales. Primary
metal production missed our estimate by 6 kt and copper by 8 kt. Value-added product mix was
also weak; and (2) significant increase in cost of production on account of increase in CP coke,
furnace oil and coal prices and expenses associated with stabilization of Hirakud smelter after
disruptions in the previous quarter. The management quantified the cumulative impact of the cost
increase and disruptions at Rs1 bn for the aluminium business segment.
9-12 month delay in greenfield projects
Hindalco announced a nine-month delay in commissioning of Utkal Alumina refinery (revised
schedule of early 2012) and about a year to end-2012 for Aditya Aluminium smelter. The company
retained its commissioning target of Oct 2011 for the Mahan Aluminium smelter. The extent of
delay in the Utkal Alumina refinery is surprising noting that the company had achieved financial
closure and was in advanced stage of construction. Given that it takes about 12-18 months to
stabilize an alumina refinery, full alumina production from Utkal will be available only in FY2014.
Delays imply that greenfield project-led-growth will shift to FY2014 from FY2013 earlier.
Sufficient catalysts despite delays, Retain ADD rating
We lower aluminium metal volumes for FY2013E by 36.6% to 688 kt on account of the delay in
commissioning greenfield projects. Despite the delay, we believe there are sufficient catalysts for
stock performance, including (1) brownfield expansion of Hirakud smelter to 213 ktpa by end-
FY2012E from 155 ktpa; (2) Hirakud FRP project which may be commissioned by end-FY2012E;
(3) volume expansion and profitability improvement through mix change in Novelis. We retain our
FY2011E and FY2012E EPS of Rs14.9 and Rs16.9, respectively. However, we lower our FY2013E
EPS estimate by 13.8% to Rs18.6 on the back of delay in commissioning of greenfield projects.
We retain our ADD rating with a revised end-FY2012E fair value of Rs250/ share (Rs255/ share
earlier).
Key changes to our estimates
We revise our FY2011E, FY2012E and FY2013E EPS estimate to Rs14.9, Rs16.9 and Rs18.6,
from Rs15, Rs16.9 and Rs21.5. We increase our FY2011E and FY2012E EBITDA estimate by
7.7% and 3.4% to Rs87 bn and Rs88.3 bn, respectively, while we lower our FY2013E
EBITDA estimate by 19.1% to Rs 94.4 bn. The following factors drive our estimates change:
�� We model revised aluminium price of US$2,210, US$2,250 and US$2,300 for FY2011E,
FY2012E and FY2013E versus US$2,050 US$2.150 and US$2,300 earlier. The revision is
largely on account of cost-push factors driving up cost of production of aluminium
globally
�� We lower aluminium metal production to 572 kt and 688 kt for FY2012E and FY2013E
versus 603 kt and 1,085 kt earlier. We also lower alumina production by 3% and 29% to
1,425 kt and 1800kt for FY2012E and FY2013E, respectively. We model lower production
from Mahan Smelter and from Utkal Alumina in FY2013E. We assume that Aditya
Aluminium smelter will be commissioned only in FY2014E
�� We incorporate KIE economist’s revised Re/US$ forecast of Rs45.6, Rs45.5 and Rs44 for
FY2011E, FY2012E and FY2013E versus Rs45.5, Rs44.5 and Rs44.1 earlier
Mahan Aluminium smelter—Hindalco applies for temporary coal linkage
Hindalco has applied to the Ministry of Coal for tapering linkage for the Mahan captive
power plant (CPP) until the company’s own mines commence operations. Hindalco’s coal
block (Mahan coal block to be jointly developed by Essar and Hindalco) in Madhya Pradesh,
has been included in the “No Go” zone; as a result forest advisory committee has not given
its decision on forest clearance for the coal block. We believe that Hindalco’s COP from
Mahan smelter may increase by US$200-400/ ton if it relies on linkage-imported coal from
the originally envisaged plan
Hindalco has appointed bankers for launching Rupee term-loan syndication for achieving
financial closure for the Mahan project
Results analysis
Aluminium business segment performance impacted by lower production
Hindalco’s aluminium segment reported net revenues of Rs19.8 bn (+3.5% qoq, +4.9% yoy),
9.7% lower than our estimate of Rs21.9 bn. Realization of US$3,244/ ton was 5.7% lower
than our estimate. Contribution from value-added products declined to 40.8% of total
production (51.6% in 2QFY11) and contributed to the earnings miss. Aluminium EBIT
increased 9.7% qoq and 6.1% yoy primarily on the back of higher realizations. Note that
the decline in value-added products, increase in cost of raw materials and costs associated
with stabilization of Hirakud plant neutralized a fair bit of aluminium price increase
Copper business segment—steady performance
Copper EBIT declined 10.3% yoy to Rs1.4 bn, 10.4% below our estimates. Production of
80K tons was lower than expected. Refined copper production was impacted by breakdown
of cooling tower at Dahej. The recent increase in Tc/Rc to 20c/lb bodes well; we believe that
annual Tc/Rc contracts may settle at 17c/lb versus 12/c/lb in 2010.
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