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Hindalco Industries (HALC.BO)
Buy: Estimates Update; Target Price Upgraded
Increasing TP, maintain Buy — We raise our TP to Rs269 (from Rs258). Our FY11
cons PAT rises by 8% on higher volumes for Novelis. Our FY12 PAT is flat; FY13 PAT is
cut by 9% - PAT gains from higher LME/FX rates/volumes for Novelis, but is impacted
by higher coal costs/lower Hindalco volumes. Our TP also rises as net debt falls
(expansion delays). We continue to value Hindalco standalone at 8.5x FY12 PE & other
businesses at 7.5x EV/EBITDA. Hindalco’s standalone value accounts for Rs119 (of
Rs269) vs Rs125 (of Rs258) earlier. At our TP, it would trade at 7.6x FY12 EV/EBITDA
and 13.2x PE. Upside triggers: further LME gains and/or Mahan coal block approval.
Novelis: stable margins; offers downside protection — 1) Novelis has been
reporting strong quarterly trends in FY11 driven by strong demand across markets. 2)
Its recent debt restructuring gives it flexibility to fund its own and the group’s capex
plans – it recently returned US$1.7bn to Hindalco. 3) Novelis’ capacity should grow by
3-4% pa through FY14 (debottlenecking) and it has expansion plans in Brazil and Asia.
Based on the trends so far, Novelis feels its adj EBITDA will exceed $1bn in FY11 (we
estimate $1.07bn in FY11 & $1.1bn in FY12).
Aluminium: preferred metal — We expect it to trade in a range of US$2,500-2,600/t
through 2013. Two key issues will determine the outlook: (1) The sustainability of
inventory financing (no unwind as yet); (2) Smelter output in China (restart begun).
Hindalco's growth plans — Hindalco is among the lowest-cost aluminium smelters
globally (capacity 500ktpa), well-integrated with captive power, bauxite and 30% of its
own coal. It plans to triple its smelter capacity to 1.6mtpa with matching alumina/power
of which 770ktpa (152% increase to 1.28mtpa) of smelter capacity will be completed by
end-CY12 and the rest by 2015. As its coal block remains uncertain, we assume hikes
in power costs, but Hindalco feels optimistic about approval to mine captive coal.
Risks — Lower margins/volumes; Rupee appreciation; lower import duties
Hindalco Industries
Company description
In India, Hindalco is a low-cost integrated aluminum producer (capacity ~500,000
tpa) with access to captive power and bauxite. It has a copper smelting capacity of
500,000 tpa. In aluminum it has a strong domestic market share with a dominant
share in sheet products. Hindalco plans to triple its alumina and aluminum capacity
by 2015 in stages, with projects such as Utkal Alumina (Orissa), Aditya Aluminium
(Orissa) and Mahan (Madhya Pradesh) expected to be completed by end-CY12 and
increasing aluminium smelter capacity by 152% to 1.28m tpa. On 15 May 2007,
Hindalco acquired Novelis, the world's leading aluminium rolled products producer
(FY10 sales of 2.85m tonnes), and a leader in the can sheet market. Novelis' key
markets are North America and Europe (~70% of FY10 shipments) with the rest
sold in Asia and South America. Beverage and food cans are the biggest end-use
market for Novelis, accounting for more than 50% of volumes.
Investment strategy
We rate Hindalco Buy/Medium Risk (1M). Aluminium is one of our preferred metals
and we expect it to trade in a range of US$2,500-2,600/t through 2013. Two key
issues will determine the outlook: (1) The sustainability of inventory financing, which
shows no sign of unwinding (at least for now); (2) Smelter output in China (which
has begun to restart). Additionally, spot copper TC/RCs have rebounded recently to
above US20c/lb. Contributing factors appear to be reduced copper smelter
capability and reduced copper concentrate demand in China. Hindalco’s growth in
earnings in the next 4-5 years will be driven by low-cost, fully-integrated aluminium
capacity being set up in India. Novelis has performed well in the first nine months of
FY11 with EBITDA/t ranging from US$317-378. Based on this trend, Novelis should
easily meet management target of its adj. EBITDA exceeding $1bn. We estimate
adj. EBITDA of US$1.07bn in FY11 and US$1.1bn in FY12. Management expects to
see robust demand in most of its markets and product segments. It sees firm
demand in Asia/South America (~30% of volumes) and moderate growth in North
America/Europe. Can sheets (more than 50% of volumes) continue to be a very
strong sector. Novelis’ recent debt restructuring gives it flexibility to fund its own and
the group’s capex plans – it recently returned US$1.7bn to Hindalco. Novelis’
capacity should grow by 3-4% pa through FY14 (debottlenecking) and it has
expansion plans in Brazil and Asia.
Valuation
Our target price of Rs269 is based on SOTP. To value Hindalco standalone we use
a P/E of 8.5x on FY12 earnings, at the higher end of its trading range (6x to 10x)
over the past five years. We use P/E because stocks such as Hindalco are largely
driven by commodity price trends, which translate into earnings momentum. The
multiple appears justified given our outlook of improving aluminium prices and its
position as a low-cost domestic producer. We value Novelis and Hindalco's other
businesses at 7.5x EV/EBITDA and we estimate EBITDA/tonne of US$340 in FY12
and FY13. The valuation is at a small premium to average global multiples, which
range from 6x to 8x. We use EV/EBITDA (rather than P/E) because Novelis has a
high level of debt. At our target price, Hindalco would trade at a consolidated FY12
EV/EBITDA of 7.6x and P/E of 13.2x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HALC.BO)
Buy: Estimates Update; Target Price Upgraded
Increasing TP, maintain Buy — We raise our TP to Rs269 (from Rs258). Our FY11
cons PAT rises by 8% on higher volumes for Novelis. Our FY12 PAT is flat; FY13 PAT is
cut by 9% - PAT gains from higher LME/FX rates/volumes for Novelis, but is impacted
by higher coal costs/lower Hindalco volumes. Our TP also rises as net debt falls
(expansion delays). We continue to value Hindalco standalone at 8.5x FY12 PE & other
businesses at 7.5x EV/EBITDA. Hindalco’s standalone value accounts for Rs119 (of
Rs269) vs Rs125 (of Rs258) earlier. At our TP, it would trade at 7.6x FY12 EV/EBITDA
and 13.2x PE. Upside triggers: further LME gains and/or Mahan coal block approval.
Novelis: stable margins; offers downside protection — 1) Novelis has been
reporting strong quarterly trends in FY11 driven by strong demand across markets. 2)
Its recent debt restructuring gives it flexibility to fund its own and the group’s capex
plans – it recently returned US$1.7bn to Hindalco. 3) Novelis’ capacity should grow by
3-4% pa through FY14 (debottlenecking) and it has expansion plans in Brazil and Asia.
Based on the trends so far, Novelis feels its adj EBITDA will exceed $1bn in FY11 (we
estimate $1.07bn in FY11 & $1.1bn in FY12).
Aluminium: preferred metal — We expect it to trade in a range of US$2,500-2,600/t
through 2013. Two key issues will determine the outlook: (1) The sustainability of
inventory financing (no unwind as yet); (2) Smelter output in China (restart begun).
Hindalco's growth plans — Hindalco is among the lowest-cost aluminium smelters
globally (capacity 500ktpa), well-integrated with captive power, bauxite and 30% of its
own coal. It plans to triple its smelter capacity to 1.6mtpa with matching alumina/power
of which 770ktpa (152% increase to 1.28mtpa) of smelter capacity will be completed by
end-CY12 and the rest by 2015. As its coal block remains uncertain, we assume hikes
in power costs, but Hindalco feels optimistic about approval to mine captive coal.
Risks — Lower margins/volumes; Rupee appreciation; lower import duties
Hindalco Industries
Company description
In India, Hindalco is a low-cost integrated aluminum producer (capacity ~500,000
tpa) with access to captive power and bauxite. It has a copper smelting capacity of
500,000 tpa. In aluminum it has a strong domestic market share with a dominant
share in sheet products. Hindalco plans to triple its alumina and aluminum capacity
by 2015 in stages, with projects such as Utkal Alumina (Orissa), Aditya Aluminium
(Orissa) and Mahan (Madhya Pradesh) expected to be completed by end-CY12 and
increasing aluminium smelter capacity by 152% to 1.28m tpa. On 15 May 2007,
Hindalco acquired Novelis, the world's leading aluminium rolled products producer
(FY10 sales of 2.85m tonnes), and a leader in the can sheet market. Novelis' key
markets are North America and Europe (~70% of FY10 shipments) with the rest
sold in Asia and South America. Beverage and food cans are the biggest end-use
market for Novelis, accounting for more than 50% of volumes.
Investment strategy
We rate Hindalco Buy/Medium Risk (1M). Aluminium is one of our preferred metals
and we expect it to trade in a range of US$2,500-2,600/t through 2013. Two key
issues will determine the outlook: (1) The sustainability of inventory financing, which
shows no sign of unwinding (at least for now); (2) Smelter output in China (which
has begun to restart). Additionally, spot copper TC/RCs have rebounded recently to
above US20c/lb. Contributing factors appear to be reduced copper smelter
capability and reduced copper concentrate demand in China. Hindalco’s growth in
earnings in the next 4-5 years will be driven by low-cost, fully-integrated aluminium
capacity being set up in India. Novelis has performed well in the first nine months of
FY11 with EBITDA/t ranging from US$317-378. Based on this trend, Novelis should
easily meet management target of its adj. EBITDA exceeding $1bn. We estimate
adj. EBITDA of US$1.07bn in FY11 and US$1.1bn in FY12. Management expects to
see robust demand in most of its markets and product segments. It sees firm
demand in Asia/South America (~30% of volumes) and moderate growth in North
America/Europe. Can sheets (more than 50% of volumes) continue to be a very
strong sector. Novelis’ recent debt restructuring gives it flexibility to fund its own and
the group’s capex plans – it recently returned US$1.7bn to Hindalco. Novelis’
capacity should grow by 3-4% pa through FY14 (debottlenecking) and it has
expansion plans in Brazil and Asia.
Valuation
Our target price of Rs269 is based on SOTP. To value Hindalco standalone we use
a P/E of 8.5x on FY12 earnings, at the higher end of its trading range (6x to 10x)
over the past five years. We use P/E because stocks such as Hindalco are largely
driven by commodity price trends, which translate into earnings momentum. The
multiple appears justified given our outlook of improving aluminium prices and its
position as a low-cost domestic producer. We value Novelis and Hindalco's other
businesses at 7.5x EV/EBITDA and we estimate EBITDA/tonne of US$340 in FY12
and FY13. The valuation is at a small premium to average global multiples, which
range from 6x to 8x. We use EV/EBITDA (rather than P/E) because Novelis has a
high level of debt. At our target price, Hindalco would trade at a consolidated FY12
EV/EBITDA of 7.6x and P/E of 13.2x.
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