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Awaiting project triggers
After a strong 2010, Hindalco has underperformed in YTD 2011 despite rising
aluminium prices due to project delays and rising costs in India. However, we
see low chance of a delay in the Utkal refinery and Mahan smelter beyond
end-FY12 and expect stock performance to improve closer to commissioning
in 2HFY12. For the next six months though, stock might stay range-bound
unless aluminium prices rally or Novelis surprises. We cut FY12-13 EPS 6%
factoring in the 30% hike in coal prices by Coal India and higher interest costs
in Novelis. FY12-13 EPS will rise 5-12% if current LME aluminium prices
sustain. Maintain BUY. We still see a value of Rs300+ on a 2-yr view.
Mahan smelter, Utkal refinery & Hirakud expansion by end-FY12
Hindalco is targeting to commission the Mahan smelter and the Utkal Alumina
refinery in 3Q and 4QFY12 respectively and has recently completed the financial
closure of the Mahan smelter. Construction work is progressing well and we
believe that both projects will get commissioned by end-FY12. The Aditya smelter,
though, is moving slower and we don’t expect commissioning before 1QFY14
(Hindalco targets Dec-12). Hindalco’s existing Hirakud smelter will see a 32%
expansion in capacity to 213ktpa by end-FY12, which will improve blended
margins for existing capacity since the captive power plant at Hirakud is backed
by a captive coal mine. FY12 will not see much volume growth but we see 43%
aluminium volume CAGR over FY12-14.
India costs remain a concern
A key worry we have is that Coal India might take more price hikes for non-power
customers in the future if it faces opposition to taking a price hike for power
customers. The recent 30% hike in coal prices has already pushed up Hindalco’s
India cash costs by 5% to ~US$1650/t and more hikes will weaken margins
further for existing capacity. In addition, the Mahan coal block ‘no-go’ area issue
remains unresolved but given that the Mahan smelter has achieved substantial
progress, we see a reasonable likelihood of Hindalco obtaining clearance for this
coal block. However, there could be some delays in start of production at this coal
block. Without the captive coal, Hindalco will have to rely on expensive e-auction
coal / unreliable linkage coal, which will impact the ROCE profile of the project.
Stock performance should improve closer to project commissioning
We believe that Hindalco’s guidance on project completion now becomes crucial
and if there are no further delays, stock performance should improve in 2H while
remaining dependent on aluminium prices / Novelis in 1H. Novelis will continue to
do well but we suspect that the profit upgrade cycle in Novelis is over. Maintain
BUY. We see 23% upside on a 1-year view but a higher 50-60% upside in 2 years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Awaiting project triggers
After a strong 2010, Hindalco has underperformed in YTD 2011 despite rising
aluminium prices due to project delays and rising costs in India. However, we
see low chance of a delay in the Utkal refinery and Mahan smelter beyond
end-FY12 and expect stock performance to improve closer to commissioning
in 2HFY12. For the next six months though, stock might stay range-bound
unless aluminium prices rally or Novelis surprises. We cut FY12-13 EPS 6%
factoring in the 30% hike in coal prices by Coal India and higher interest costs
in Novelis. FY12-13 EPS will rise 5-12% if current LME aluminium prices
sustain. Maintain BUY. We still see a value of Rs300+ on a 2-yr view.
Mahan smelter, Utkal refinery & Hirakud expansion by end-FY12
Hindalco is targeting to commission the Mahan smelter and the Utkal Alumina
refinery in 3Q and 4QFY12 respectively and has recently completed the financial
closure of the Mahan smelter. Construction work is progressing well and we
believe that both projects will get commissioned by end-FY12. The Aditya smelter,
though, is moving slower and we don’t expect commissioning before 1QFY14
(Hindalco targets Dec-12). Hindalco’s existing Hirakud smelter will see a 32%
expansion in capacity to 213ktpa by end-FY12, which will improve blended
margins for existing capacity since the captive power plant at Hirakud is backed
by a captive coal mine. FY12 will not see much volume growth but we see 43%
aluminium volume CAGR over FY12-14.
India costs remain a concern
A key worry we have is that Coal India might take more price hikes for non-power
customers in the future if it faces opposition to taking a price hike for power
customers. The recent 30% hike in coal prices has already pushed up Hindalco’s
India cash costs by 5% to ~US$1650/t and more hikes will weaken margins
further for existing capacity. In addition, the Mahan coal block ‘no-go’ area issue
remains unresolved but given that the Mahan smelter has achieved substantial
progress, we see a reasonable likelihood of Hindalco obtaining clearance for this
coal block. However, there could be some delays in start of production at this coal
block. Without the captive coal, Hindalco will have to rely on expensive e-auction
coal / unreliable linkage coal, which will impact the ROCE profile of the project.
Stock performance should improve closer to project commissioning
We believe that Hindalco’s guidance on project completion now becomes crucial
and if there are no further delays, stock performance should improve in 2H while
remaining dependent on aluminium prices / Novelis in 1H. Novelis will continue to
do well but we suspect that the profit upgrade cycle in Novelis is over. Maintain
BUY. We see 23% upside on a 1-year view but a higher 50-60% upside in 2 years.
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