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Hindalco Industries
Neutral
HALC.BO, HNDL IN
Recent correction makes stock interesting, but no
near-term catalysts in sight
• Recent pullback makes stock interesting; Utkal likely to be the key
from here: After outperforming the broader NIFTY by 35% in 2010,
HNDL has pulled back by ~19%. This, in our view, has broadly been driven
by a) rising costs in aluminum (carbon and coal), and b) pushback in project
timelines for Utkal. While the steady (and growing) Novelis earnings
provide downside support for the stock price (and earnings) from here, we
believe a meaningful potential catalyst from here is essentially the
commissioning of Utkal (1Q CY12E). There could be positive news flow on
the Mahan coal block. We cut our FY11-13 EPS estimates by 10-16% and
our Mar-12 PT to Rs237. We would be more constructive on the stock at
Rs180 (when EV/EBITDA would be around 5x) and/or on increased
visibility of Utkal commissioning.
• As coal costs rise, new projects will be key: Indian aluminum companies
face the risk of increasing coal costs as COAL reduces the price differential.
Against this backdrop, we believe Utkal (alumina) and Mahan (smelter +
captive coal) are critical for HNDL’s upstream aluminum segment, although
the volume impact is likely to only flow through in FY14 even at current
completion dates.
• Coal, carbon cost surge to hit upstream aluminum earnings: We
estimate HNDL’s aluminum CoP at Renukoot to have risen to
~$1600/MT and alumina CoP to $225/MT given coal (0.4MT Renukoot
smelter has been impacted by the 30% Coal India price increase), caustic
and carbon costs increases. LME aluminum has been resilient given the
MENA issues, but the sheer inventory/overcapacity makes any meaningful
price increase independent of cost push difficult, in our view. Copper
operations should benefit from Tc/Rc up-move, but given the low share
of overall EBITDA mix (~8.5%), it is unlikely to move the needle much.
• Novelis – Demand, pricing power remain robust: Novelis should continue
to benefit from strong demand and pricing power in select end markets, and
we expect EBITDA to rise to $1.28B in FY13. By our estimates, HNDL will
receive $200MM per year in dividend from Novelis in FY12/13. At some
point over the next 4-6 quarters, we expect Novelis to pursue
acquisitions, possibly in Asia. HNDL has been able to partially monetize
the Novelis improvement via the recent financial re-structuring.
Price target and valuation analysis
Hindalco is India’s largest aluminum and copper
producer. In aluminum the company is fully
integrated with production ranging from captive
bauxite to an array of value added products, while
in copper the company is primarily into custom
copper smelting. Hindalco is among the world’s
lowest-cost aluminum producers. After its
acquisition of Novelis last year, the company is one
of the largest rolled producers of aluminum.
Our Mar-12 PT of Rs237 is based on FY13E SOTP. We increase
modestly our EV/EBITDA multiple for Novelis to 6.3x from 6x
earlier given the earnings improvement. We reduce our India
aluminum multiple by 5% to 5.7x given the recent coal price
increase. We also introduce a value for the IDEA stake given media
reports (Bloomberg) of a possible M&A transaction in IDEA.
While current valuations at 6.8x FY12E EV/EBITDA on $2600/MT
Al prices appear stretched, a continued bullish LME Al price
environment could further expand multiples.
Key upside risks include: a) a sharp increase in LME aluminum
prices; b) project commissioning and ramp-up ahead of schedule.
Key downside risks include: a) a decline in LME aluminum prices
given inventory surge; b) a sharp increase in aluminum CoP.
Utkal/Mahan –key from here as LME aluminum up-move
from China production cuts fades out
HNDL outperformed the broader NIFTY and the Indian metals index in 2010 as
Novelis improved (with increasing free cash flow generation) and, importantly, due
to the Chinese power cuts in September, which increased expectations of a sharp
decline in Chinese aluminum production and subsequently an up-move in LME
aluminum prices. HNDL went up ~53% from Sept-10 levels when news flow of
China imposing power cuts across key user industries surfaced. Since hitting a high
of Rs251 on 6 Jan-2011, HNDL has corrected to Rs209 and so far YTD has
underperformed the broader NIFTY and peers.
We believe the key catalyst for an HNDL re-rating from here will be the
commissioning of new projects, with Utkal alumina being the most important one, in
our view. As alumina prices are de-linked from LME aluminum prices, the
profitability of the 1.5MT alumina refiner at current alumina prices of $405/MT is
substantial in our view (we estimate a CoP of $140-150/MT). For the Mahan
aluminum smelter project (slated for commissioning towards end 3Q FY12E),
profitability will depend on the Mahan coal block and the Utkal alumina refinery.
Recent media reports (Bloomberg, ET) have carried reports about a possible easing
of the GO-NO coal mining areas, which could benefit the Mahan coal block
(currently NO GO). However we would highlight that, according to the latest press
release, Mahan has applied for a stage 1 Forest Clearance. Even if we assume that
Mahan gets relief from a NO GO to GO area, given the various delays in securing
multiple clearances, there is a possibility of Mahan coal block production being
delayed.
Meaningful volume growth only in FY14E, even as
aluminum CoP surges
Assuming that Mahan gets commissioned in 3Q FY12 and Utkal in 1Q CY12, we
believe meaningful volume benefit will come only in FY14 given the ramp-up times.
Hence the next few quarters are unlikely to see any meaningful volume growth.
Cost pressures in both alumina and aluminum have surged over the past few months
given the high cost inflation seen in key cost items such as caustic, coal, and carbon.
Of these, we are most worried about coal, as COAL India’s recent differential coal
pricing policy looks to reduce the import price gap for non-power users such as
aluminum. HNDL’s Renukoot smelter is dependent on COAL India Coal. We
estimate current alumina CoP at $225/MT and aluminum CoP at $1600/MT.
Although these are still low globally, with a trend of coal costs increasing, we believe
CoP is likely to remain elevated (although carbon costs would come down with any
oil price correction).
Novelis – Steady improvement to continue
Novelis has continued to surprise on the upside even though volume growth is not
there (operating at full capacity). This essentially comes from cost-cutting and
rationalization implemented by the company. More importantly, end demand remains
robust, with the company having pricing power in many end markets (Novelis
reported price increases across select products). While post March-11E quarter, the
y/y gradient of profitability improvement will likely ease, given the high base, we
believe EBITDA/MT will continue to modestly move up from here. The recent
financial restructuring, in which Novelis has geared up, is a sign of confidence in the
run rate EBITDA for Novelis, in our view. We expect Novelis to pay out $200MM
as dividend per year to HNDL in FY12-13. As Novelis lacks a meaningful footprint
in Asia, and the balance sheet could support acquisitions to build up a presence there,
we believe that at some point over the next 4-6 quarters, Novelis is likely to pursue
acquisitions in Asia.
Recent correction makes stock interesting, but no nearterm
catalysts in sight
We revise down our EPS estimates by 10-16% for FY11-13 due to: a) lower
aluminium production from new projects in FY13E;and b) higher CoP in upstream
aluminum. We increase modestly our EV/EBITDA multiple for Novelis to 6.3x from
6x earlier given the earnings improvement. We reduce our India aluminum multiple
by 5% to 5.7x given the recent coal price increase. We also introduce a value for
Hindalco’s IDEA stake given media reports (Bloomberg) of a possible M&A
transaction in IDEA. Key upside risks include: a) a sharp increase in LME aluminum
prices; and b) project commissioning and ramp up ahead of schedule. Key downside
risks include: a) a decline in LME aluminum prices given inventory surge; and b) a
sharp increase in aluminum CoP
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries
Neutral
HALC.BO, HNDL IN
Recent correction makes stock interesting, but no
near-term catalysts in sight
• Recent pullback makes stock interesting; Utkal likely to be the key
from here: After outperforming the broader NIFTY by 35% in 2010,
HNDL has pulled back by ~19%. This, in our view, has broadly been driven
by a) rising costs in aluminum (carbon and coal), and b) pushback in project
timelines for Utkal. While the steady (and growing) Novelis earnings
provide downside support for the stock price (and earnings) from here, we
believe a meaningful potential catalyst from here is essentially the
commissioning of Utkal (1Q CY12E). There could be positive news flow on
the Mahan coal block. We cut our FY11-13 EPS estimates by 10-16% and
our Mar-12 PT to Rs237. We would be more constructive on the stock at
Rs180 (when EV/EBITDA would be around 5x) and/or on increased
visibility of Utkal commissioning.
• As coal costs rise, new projects will be key: Indian aluminum companies
face the risk of increasing coal costs as COAL reduces the price differential.
Against this backdrop, we believe Utkal (alumina) and Mahan (smelter +
captive coal) are critical for HNDL’s upstream aluminum segment, although
the volume impact is likely to only flow through in FY14 even at current
completion dates.
• Coal, carbon cost surge to hit upstream aluminum earnings: We
estimate HNDL’s aluminum CoP at Renukoot to have risen to
~$1600/MT and alumina CoP to $225/MT given coal (0.4MT Renukoot
smelter has been impacted by the 30% Coal India price increase), caustic
and carbon costs increases. LME aluminum has been resilient given the
MENA issues, but the sheer inventory/overcapacity makes any meaningful
price increase independent of cost push difficult, in our view. Copper
operations should benefit from Tc/Rc up-move, but given the low share
of overall EBITDA mix (~8.5%), it is unlikely to move the needle much.
• Novelis – Demand, pricing power remain robust: Novelis should continue
to benefit from strong demand and pricing power in select end markets, and
we expect EBITDA to rise to $1.28B in FY13. By our estimates, HNDL will
receive $200MM per year in dividend from Novelis in FY12/13. At some
point over the next 4-6 quarters, we expect Novelis to pursue
acquisitions, possibly in Asia. HNDL has been able to partially monetize
the Novelis improvement via the recent financial re-structuring.
Price target and valuation analysis
Hindalco is India’s largest aluminum and copper
producer. In aluminum the company is fully
integrated with production ranging from captive
bauxite to an array of value added products, while
in copper the company is primarily into custom
copper smelting. Hindalco is among the world’s
lowest-cost aluminum producers. After its
acquisition of Novelis last year, the company is one
of the largest rolled producers of aluminum.
Our Mar-12 PT of Rs237 is based on FY13E SOTP. We increase
modestly our EV/EBITDA multiple for Novelis to 6.3x from 6x
earlier given the earnings improvement. We reduce our India
aluminum multiple by 5% to 5.7x given the recent coal price
increase. We also introduce a value for the IDEA stake given media
reports (Bloomberg) of a possible M&A transaction in IDEA.
While current valuations at 6.8x FY12E EV/EBITDA on $2600/MT
Al prices appear stretched, a continued bullish LME Al price
environment could further expand multiples.
Key upside risks include: a) a sharp increase in LME aluminum
prices; b) project commissioning and ramp-up ahead of schedule.
Key downside risks include: a) a decline in LME aluminum prices
given inventory surge; b) a sharp increase in aluminum CoP.
Utkal/Mahan –key from here as LME aluminum up-move
from China production cuts fades out
HNDL outperformed the broader NIFTY and the Indian metals index in 2010 as
Novelis improved (with increasing free cash flow generation) and, importantly, due
to the Chinese power cuts in September, which increased expectations of a sharp
decline in Chinese aluminum production and subsequently an up-move in LME
aluminum prices. HNDL went up ~53% from Sept-10 levels when news flow of
China imposing power cuts across key user industries surfaced. Since hitting a high
of Rs251 on 6 Jan-2011, HNDL has corrected to Rs209 and so far YTD has
underperformed the broader NIFTY and peers.
We believe the key catalyst for an HNDL re-rating from here will be the
commissioning of new projects, with Utkal alumina being the most important one, in
our view. As alumina prices are de-linked from LME aluminum prices, the
profitability of the 1.5MT alumina refiner at current alumina prices of $405/MT is
substantial in our view (we estimate a CoP of $140-150/MT). For the Mahan
aluminum smelter project (slated for commissioning towards end 3Q FY12E),
profitability will depend on the Mahan coal block and the Utkal alumina refinery.
Recent media reports (Bloomberg, ET) have carried reports about a possible easing
of the GO-NO coal mining areas, which could benefit the Mahan coal block
(currently NO GO). However we would highlight that, according to the latest press
release, Mahan has applied for a stage 1 Forest Clearance. Even if we assume that
Mahan gets relief from a NO GO to GO area, given the various delays in securing
multiple clearances, there is a possibility of Mahan coal block production being
delayed.
Meaningful volume growth only in FY14E, even as
aluminum CoP surges
Assuming that Mahan gets commissioned in 3Q FY12 and Utkal in 1Q CY12, we
believe meaningful volume benefit will come only in FY14 given the ramp-up times.
Hence the next few quarters are unlikely to see any meaningful volume growth.
Cost pressures in both alumina and aluminum have surged over the past few months
given the high cost inflation seen in key cost items such as caustic, coal, and carbon.
Of these, we are most worried about coal, as COAL India’s recent differential coal
pricing policy looks to reduce the import price gap for non-power users such as
aluminum. HNDL’s Renukoot smelter is dependent on COAL India Coal. We
estimate current alumina CoP at $225/MT and aluminum CoP at $1600/MT.
Although these are still low globally, with a trend of coal costs increasing, we believe
CoP is likely to remain elevated (although carbon costs would come down with any
oil price correction).
Novelis – Steady improvement to continue
Novelis has continued to surprise on the upside even though volume growth is not
there (operating at full capacity). This essentially comes from cost-cutting and
rationalization implemented by the company. More importantly, end demand remains
robust, with the company having pricing power in many end markets (Novelis
reported price increases across select products). While post March-11E quarter, the
y/y gradient of profitability improvement will likely ease, given the high base, we
believe EBITDA/MT will continue to modestly move up from here. The recent
financial restructuring, in which Novelis has geared up, is a sign of confidence in the
run rate EBITDA for Novelis, in our view. We expect Novelis to pay out $200MM
as dividend per year to HNDL in FY12-13. As Novelis lacks a meaningful footprint
in Asia, and the balance sheet could support acquisitions to build up a presence there,
we believe that at some point over the next 4-6 quarters, Novelis is likely to pursue
acquisitions in Asia.
Recent correction makes stock interesting, but no nearterm
catalysts in sight
We revise down our EPS estimates by 10-16% for FY11-13 due to: a) lower
aluminium production from new projects in FY13E;and b) higher CoP in upstream
aluminum. We increase modestly our EV/EBITDA multiple for Novelis to 6.3x from
6x earlier given the earnings improvement. We reduce our India aluminum multiple
by 5% to 5.7x given the recent coal price increase. We also introduce a value for
Hindalco’s IDEA stake given media reports (Bloomberg) of a possible M&A
transaction in IDEA. Key upside risks include: a) a sharp increase in LME aluminum
prices; and b) project commissioning and ramp up ahead of schedule. Key downside
risks include: a) a decline in LME aluminum prices given inventory surge; and b) a
sharp increase in aluminum CoP
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