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Hindalco (HNDL)
OW(V): 3Q results - Mixed news
Inferior aluminium product-mix, continued low production at
Hirakud and high input costs lead to 3Q EBITDA at c15%
below estimates
‘Aditya’ delayed a year now; stage-2 forest clearance in
place, but limited time for balance of land acquisition
Cut estimates to account for delayed execution, lower TP to
INR255 (from INR260); Retain OW(V)
3Q below estimates; inferior mix, higher costs and lower production to blame
Standalone EBITDA at INR7.4bn, was up just 3% q-o-q (down 8% y-o-y) and below
our (INR8.9bn) and consensus (INR8.4bn) estimates.
Continued lower production at Hirakud and resulting inferior product mix (evident
from ally revenues flat q-o-q despite a 12% jump in LME and c10% higher volumes),
lower long-term copper TC/RCs, stronger INR and a c25% y-o-y increase in crude
derivative costs were predominantly responsible for lower-than-expected results.
Cost pressures are expected to persist, but, we expect the product mix to return to
normal with the Hirakud smelter restarting in Dec-10. In addition, there appears from
both (HNDL and NACL) results that there was a lag in passing-on higher aluminium
prices in Indian markets; this will likely rectify in 4QFY11.
Mixed news on projects; more negative than positive
All projects are running a few quarters delayed (Utkal Alumina and Mahan smelter
running late 2Qs, Aditya Aluminium running late 4Qs). Whereas we had built in some
delays for all the projects, these delays are longer than our original estimates.
Allocated coal block for Mahan smelter is still in the “NO GO” area. As an interim
measure, HNDL has applied to the Ministry of Coal for temporary supply of coal on
tapering linkage basis to the Mahan CPP.
On a positive note, HNDL did receive Stage-2 forest clearance for the Aditya
Aluminium. Assuming it takes c18 months to construct the smelter, HNDL has just
about 4 months to acquire the balance of the land (which needs to be acquired) if it
wants to stick to its revised deadline of end 2012 commissioning.
Longer end projects are running delayed as well with Aditya Refinery Project being
rescheduled to end CY2014 (earlier FY14 ) and Jharkhand Aluminium to mid
CY2015 (from FY14)
Cut estimates and TP; retain OW(V)
Following delayed project execution, we cut our EBITDA estimates for FY12e/FY13e by
4% and 13% respectively. We remain OW(V) on HNDL with a lower TP of INR255.
Delays in project execution and weaker than expected aluminium prices are key risks for
the stock. Mahan Coal Block clearance is a key stock catalyst.
Valuation and risks
Our primary valuation of HNDL is based on FY12e EV/EBITDA of 6.5x for the standalone business and
other businesses and 8.0x EV/EBITDA for Novelis. Our valuation comprises enterprise values of INR138
per share for HNDL’s standalone business, INR207 for Novelis and INR24 for other businesses; it
deducts INR113 per share in net debt. We arrive at a target price of INR255 (from INR260). Our TP
indicates a potential return of c22% including dividend yield over the closing price of INR211 on 11 Feb
2011, which lies above HSBC’s Neutral band of 1% to 21% for a volatile stock. Hence, we are
Overweight (V) on HNDL.
Delays in project execution and weaker than expected aluminium prices pose negative risk to earnings.
High financial leverage creates high earnings sensitivity and is negative in downcycles. In addition,
increasing competition may pose a risk to incremental volumes offtake for Novelis. Historical low free
cash flow in Novelis is also a concern.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco (HNDL)
OW(V): 3Q results - Mixed news
Inferior aluminium product-mix, continued low production at
Hirakud and high input costs lead to 3Q EBITDA at c15%
below estimates
‘Aditya’ delayed a year now; stage-2 forest clearance in
place, but limited time for balance of land acquisition
Cut estimates to account for delayed execution, lower TP to
INR255 (from INR260); Retain OW(V)
3Q below estimates; inferior mix, higher costs and lower production to blame
Standalone EBITDA at INR7.4bn, was up just 3% q-o-q (down 8% y-o-y) and below
our (INR8.9bn) and consensus (INR8.4bn) estimates.
Continued lower production at Hirakud and resulting inferior product mix (evident
from ally revenues flat q-o-q despite a 12% jump in LME and c10% higher volumes),
lower long-term copper TC/RCs, stronger INR and a c25% y-o-y increase in crude
derivative costs were predominantly responsible for lower-than-expected results.
Cost pressures are expected to persist, but, we expect the product mix to return to
normal with the Hirakud smelter restarting in Dec-10. In addition, there appears from
both (HNDL and NACL) results that there was a lag in passing-on higher aluminium
prices in Indian markets; this will likely rectify in 4QFY11.
Mixed news on projects; more negative than positive
All projects are running a few quarters delayed (Utkal Alumina and Mahan smelter
running late 2Qs, Aditya Aluminium running late 4Qs). Whereas we had built in some
delays for all the projects, these delays are longer than our original estimates.
Allocated coal block for Mahan smelter is still in the “NO GO” area. As an interim
measure, HNDL has applied to the Ministry of Coal for temporary supply of coal on
tapering linkage basis to the Mahan CPP.
On a positive note, HNDL did receive Stage-2 forest clearance for the Aditya
Aluminium. Assuming it takes c18 months to construct the smelter, HNDL has just
about 4 months to acquire the balance of the land (which needs to be acquired) if it
wants to stick to its revised deadline of end 2012 commissioning.
Longer end projects are running delayed as well with Aditya Refinery Project being
rescheduled to end CY2014 (earlier FY14 ) and Jharkhand Aluminium to mid
CY2015 (from FY14)
Cut estimates and TP; retain OW(V)
Following delayed project execution, we cut our EBITDA estimates for FY12e/FY13e by
4% and 13% respectively. We remain OW(V) on HNDL with a lower TP of INR255.
Delays in project execution and weaker than expected aluminium prices are key risks for
the stock. Mahan Coal Block clearance is a key stock catalyst.
Valuation and risks
Our primary valuation of HNDL is based on FY12e EV/EBITDA of 6.5x for the standalone business and
other businesses and 8.0x EV/EBITDA for Novelis. Our valuation comprises enterprise values of INR138
per share for HNDL’s standalone business, INR207 for Novelis and INR24 for other businesses; it
deducts INR113 per share in net debt. We arrive at a target price of INR255 (from INR260). Our TP
indicates a potential return of c22% including dividend yield over the closing price of INR211 on 11 Feb
2011, which lies above HSBC’s Neutral band of 1% to 21% for a volatile stock. Hence, we are
Overweight (V) on HNDL.
Delays in project execution and weaker than expected aluminium prices pose negative risk to earnings.
High financial leverage creates high earnings sensitivity and is negative in downcycles. In addition,
increasing competition may pose a risk to incremental volumes offtake for Novelis. Historical low free
cash flow in Novelis is also a concern.
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