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Hindalco Industries (HNDL)
Metals & Mining
Execution issues crop up. Hindalco reported consolidated net income of Rs24.6 bn for
FY2011, which was lower than our estimate. Consolidated EBITDA of Rs80 bn was also
lower than our estimate. More important, the company announced cost escalations and
pushed back commissioning date of greenfield projects by further six months.
Effectively, the volume growth theme is pushed back to FY2014E. The Hindalco stock
may have downside protection from the steady and growing Novelis business though
the upside catalyst has to wait for improvement in execution.
Adjusted consolidated EBITDA grows 25% in FY2011
Hindalco reported consolidated EBITDA of Rs80 bn, down 17.9% over FY2010. After making
adjustments for unrealized gains/ losses on derivatives of Novelis, EBITDA grew 24.5% in FY2011.
Growth was led primarily by 21.2% adjusted EBITDA growth of Novelis. Performance of Nifty
mines of ABML was lower than our estimate. Net income of Rs24.6 bn declined 37.4% and was
impacted by (1) recognition of one-time debt issuance cost by Novelis of Rs8.8 bn and (2)
derivatives loss of Rs2.9 bn in FY2011 versus gain of Rs27.4 bn in FY2010 and (3) one-time costs
related to production disruption at Hirakud smelter. Hindalco reported EPS of Rs11.2 for FY2011.
Hindalco generated operating cash flow of Rs62.5 bn in FY2011 and spent Rs79.3 bn on capex.
Further delay in commissioning of greenfield projects
Hindalco announced 6-9 months delay in commissioning of Utkal, Mahan and Aditya Aluminium
projects. More important, all projects costs may go up further, specifically (1) 1.5 mtpa Utkal
Alumina project has been delayed to ‘2012’ from early 2012. The company attributed the delay to
poor performance by contractors, especially in the area of civil construction. This has also resulted
in a Rs6 bn increase in project cost, (2) 359 ktpa Mahan Aluminium Smelter project is delayed to
end-2011 from October 2011 earlier. Hindalco is reviewing project cost and timelines, and (3)
Aditya Aluminium smelter project has been pushed back to early 2013. Effectively, material
volume growth is likely only by FY2014E; we currently model 70 kt of aluminium volumes from
Mahan in FY2013E. Without captive coal block, IRR on Mahan Aluminum projects drops to ~10%.
Maintain ADD rating, Novelis provides strong valuation support
We will review our estimates post the annual analyst meet. Despite delay in commissioning of
greenfield projects, Hindalco gets strong valuation support from the steady and growing EBITDA
of Novelis. The stock trades at 5.4X FY2012E and 5X FY2013E EBITDA after assigning 1X value to
capital invested in greenfield projects. The stock will move in range with upside decided by
progress on greenfield projects. ADD rating maintained.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HNDL)
Metals & Mining
Execution issues crop up. Hindalco reported consolidated net income of Rs24.6 bn for
FY2011, which was lower than our estimate. Consolidated EBITDA of Rs80 bn was also
lower than our estimate. More important, the company announced cost escalations and
pushed back commissioning date of greenfield projects by further six months.
Effectively, the volume growth theme is pushed back to FY2014E. The Hindalco stock
may have downside protection from the steady and growing Novelis business though
the upside catalyst has to wait for improvement in execution.
Adjusted consolidated EBITDA grows 25% in FY2011
Hindalco reported consolidated EBITDA of Rs80 bn, down 17.9% over FY2010. After making
adjustments for unrealized gains/ losses on derivatives of Novelis, EBITDA grew 24.5% in FY2011.
Growth was led primarily by 21.2% adjusted EBITDA growth of Novelis. Performance of Nifty
mines of ABML was lower than our estimate. Net income of Rs24.6 bn declined 37.4% and was
impacted by (1) recognition of one-time debt issuance cost by Novelis of Rs8.8 bn and (2)
derivatives loss of Rs2.9 bn in FY2011 versus gain of Rs27.4 bn in FY2010 and (3) one-time costs
related to production disruption at Hirakud smelter. Hindalco reported EPS of Rs11.2 for FY2011.
Hindalco generated operating cash flow of Rs62.5 bn in FY2011 and spent Rs79.3 bn on capex.
Further delay in commissioning of greenfield projects
Hindalco announced 6-9 months delay in commissioning of Utkal, Mahan and Aditya Aluminium
projects. More important, all projects costs may go up further, specifically (1) 1.5 mtpa Utkal
Alumina project has been delayed to ‘2012’ from early 2012. The company attributed the delay to
poor performance by contractors, especially in the area of civil construction. This has also resulted
in a Rs6 bn increase in project cost, (2) 359 ktpa Mahan Aluminium Smelter project is delayed to
end-2011 from October 2011 earlier. Hindalco is reviewing project cost and timelines, and (3)
Aditya Aluminium smelter project has been pushed back to early 2013. Effectively, material
volume growth is likely only by FY2014E; we currently model 70 kt of aluminium volumes from
Mahan in FY2013E. Without captive coal block, IRR on Mahan Aluminum projects drops to ~10%.
Maintain ADD rating, Novelis provides strong valuation support
We will review our estimates post the annual analyst meet. Despite delay in commissioning of
greenfield projects, Hindalco gets strong valuation support from the steady and growing EBITDA
of Novelis. The stock trades at 5.4X FY2012E and 5X FY2013E EBITDA after assigning 1X value to
capital invested in greenfield projects. The stock will move in range with upside decided by
progress on greenfield projects. ADD rating maintained.
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