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Delaying projects
Hindalco is investing US$5b in greenfield projects to raise aluminum capacity 3x
to 1.6m tons and alumina capacity 2x to 3mtpa. Progress on the projects had
picked up momentum in the last 1-2 years and timelines were being maintained.
However, the projects are now delayed.
Alumina capacity is likely to double. Though the Uktal Alumina project has been
delayed by six months, we expect it to ramp-up production in FY13. Statutory
clearances for the captive bauxite mines are in place. Hence, margins in alumina
production are likely to be robust.
Primary aluminum production will dip a bit in FY11 due to breakdown at the Hirakud
smelter following torrential rain and lightning during the monsoon season. Over
FY11-FY13, the production is likely to increase at a CAGR of 19% to 750k tons
due to expansion of Hirakud and commissioning of the 359ktpa Mahan smelter.
The Mahan smelter has been allotted a coal block, but statutory clearances are
pending due to new classification of "Go/No Go" zone introduced by the Ministry
of Environment and Forest (MoEF). In the absence of coal linkages, the profitability
of the smelter has become questionable.
Gains on account of stronger LME prices are getting eroded by persisting cost
pressure for aluminum smelter in India. Hindalco has a strong pipeline of aluminum
and alumina projects, but execution delays remain a risk to our volume assumption.
Though the Mahan smelter's captive power plant has been allotted captive coal
mines, delays in operating the coal block or alternative coal linkages can adversely
impact margins.
Novelis has already surpassed its guidance of US$1b EBITDA on trailing 12-
month basis. However, margin pressure was seen in European business in 3QFY11.
Demand for FRP products remains strong. Novelis continues to focus on cost
reduction and increase in volumes through de-bottlenecking and capacity
expansion. We expect volumes to increase 20% over 3-4 years. We model EBITDA
of US$1.14b for FY12 and US$1.2b for FY13.
Novelis has returned US$1.7b (as return of capital) to Hindalco, which has been
utilized to repay acquisition debt. Consolidated interest expense for FY12 has
increased by Rs3.7b due to increase of debt at Novelis level. The benefit of reduction
in interest expense on receipt of US$650m will be going to capital account rather
than revenue account because the proceeds will be utilized for greenfield projects.
We recently cut our FY11E EPS by 9% to model lower than expected 3QFY11
results for both standalone and Novelis. We have cut our volume assumptions of
alumina and metal for FY12 and FY13 to incorporate delays in commissioning of
projects. Our FY12 alumina production estimate is cut from 1.8m tons to 1.5m
tons. Similarly, our FY13 metal production estimate is cut from 0.8m tons to
0.75m tons. We have cut our EPS estimates by 3% to Rs17.7 for FY12 and by
4% to Rs20 for FY13. The stock trades at 11.8x FY12E EPS and an EV of 6.5x
FY12E EBITDA. Maintain Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Delaying projects
Hindalco is investing US$5b in greenfield projects to raise aluminum capacity 3x
to 1.6m tons and alumina capacity 2x to 3mtpa. Progress on the projects had
picked up momentum in the last 1-2 years and timelines were being maintained.
However, the projects are now delayed.
Alumina capacity is likely to double. Though the Uktal Alumina project has been
delayed by six months, we expect it to ramp-up production in FY13. Statutory
clearances for the captive bauxite mines are in place. Hence, margins in alumina
production are likely to be robust.
Primary aluminum production will dip a bit in FY11 due to breakdown at the Hirakud
smelter following torrential rain and lightning during the monsoon season. Over
FY11-FY13, the production is likely to increase at a CAGR of 19% to 750k tons
due to expansion of Hirakud and commissioning of the 359ktpa Mahan smelter.
The Mahan smelter has been allotted a coal block, but statutory clearances are
pending due to new classification of "Go/No Go" zone introduced by the Ministry
of Environment and Forest (MoEF). In the absence of coal linkages, the profitability
of the smelter has become questionable.
Gains on account of stronger LME prices are getting eroded by persisting cost
pressure for aluminum smelter in India. Hindalco has a strong pipeline of aluminum
and alumina projects, but execution delays remain a risk to our volume assumption.
Though the Mahan smelter's captive power plant has been allotted captive coal
mines, delays in operating the coal block or alternative coal linkages can adversely
impact margins.
Novelis has already surpassed its guidance of US$1b EBITDA on trailing 12-
month basis. However, margin pressure was seen in European business in 3QFY11.
Demand for FRP products remains strong. Novelis continues to focus on cost
reduction and increase in volumes through de-bottlenecking and capacity
expansion. We expect volumes to increase 20% over 3-4 years. We model EBITDA
of US$1.14b for FY12 and US$1.2b for FY13.
Novelis has returned US$1.7b (as return of capital) to Hindalco, which has been
utilized to repay acquisition debt. Consolidated interest expense for FY12 has
increased by Rs3.7b due to increase of debt at Novelis level. The benefit of reduction
in interest expense on receipt of US$650m will be going to capital account rather
than revenue account because the proceeds will be utilized for greenfield projects.
We recently cut our FY11E EPS by 9% to model lower than expected 3QFY11
results for both standalone and Novelis. We have cut our volume assumptions of
alumina and metal for FY12 and FY13 to incorporate delays in commissioning of
projects. Our FY12 alumina production estimate is cut from 1.8m tons to 1.5m
tons. Similarly, our FY13 metal production estimate is cut from 0.8m tons to
0.75m tons. We have cut our EPS estimates by 3% to Rs17.7 for FY12 and by
4% to Rs20 for FY13. The stock trades at 11.8x FY12E EPS and an EV of 6.5x
FY12E EBITDA. Maintain Buy.
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