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Novelis has now completely shifted gears to focus on expansions. This will come at a cost, in
our view: lower valuations and free cash. Also, the wait for the Indian expansions to deliver
has grown. After the recent stock correction, we believe that even the existing businesses
are available at a discount.
Novelis to continue to outperform
Novelis continues to surprise us; EBITDA/ton has grown to US$361m in FY11 (CAGR of
48% over FY09-11) and volumes have continued to improve (+9% yoy). Management’s focus
has now shifted to expansions in Brazil and debottlenecking initiatives aimed at driving future
growth. We believe the expansion in Brazil is a step in the right direction as this market is
structurally short of rolled products and import substitution alone should drive market share.
However, increased capital expenditure is likely to deplete near-term free cash and impacts
our valuations. We lower Novelis’s contribution to our SoTP from Rs127 to Rs115.
We are positive on aluminium. But it forms just 35% of EBITDA
We maintain our positive stance on aluminium. Our commodities strategy team believes
aluminium provides an attractive risk-reward and forecasts an LME aluminium price of
US$3,200/t in 2013. With its high backward integration, a strong LME should provide a fillip
to domestic earnings. We estimate a 1% change in aluminium price results in a 2.3% change
in Hindalco earnings at the standalone level and a 1% change at the consolidated level.
However, domestic aluminium business forms just 35% of total EBITDA currently though it is
set to go up sharply over FY13-15 as the greenfield expansion plans come on-stream.
Projects pushed back, estimates cut to factor execution delays; maintain Buy
We revisit our volume assumptions and scale back our FY12/13 aluminium volumes by 6%/13%
to factor in delays. The wait has become particularly elongated due to the greenfield nature of
operations and the inevitable difficulty the company is experiencing in executing projects in
remote places. We also raise copper smelting margins, which has improved near term. Our
EBITDA estimates fall 3%/10% for FY12/13 as a result of our model changes. As a result, our
target price falls to Rs277 (from Rs315)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Novelis has now completely shifted gears to focus on expansions. This will come at a cost, in
our view: lower valuations and free cash. Also, the wait for the Indian expansions to deliver
has grown. After the recent stock correction, we believe that even the existing businesses
are available at a discount.
Novelis to continue to outperform
Novelis continues to surprise us; EBITDA/ton has grown to US$361m in FY11 (CAGR of
48% over FY09-11) and volumes have continued to improve (+9% yoy). Management’s focus
has now shifted to expansions in Brazil and debottlenecking initiatives aimed at driving future
growth. We believe the expansion in Brazil is a step in the right direction as this market is
structurally short of rolled products and import substitution alone should drive market share.
However, increased capital expenditure is likely to deplete near-term free cash and impacts
our valuations. We lower Novelis’s contribution to our SoTP from Rs127 to Rs115.
We are positive on aluminium. But it forms just 35% of EBITDA
We maintain our positive stance on aluminium. Our commodities strategy team believes
aluminium provides an attractive risk-reward and forecasts an LME aluminium price of
US$3,200/t in 2013. With its high backward integration, a strong LME should provide a fillip
to domestic earnings. We estimate a 1% change in aluminium price results in a 2.3% change
in Hindalco earnings at the standalone level and a 1% change at the consolidated level.
However, domestic aluminium business forms just 35% of total EBITDA currently though it is
set to go up sharply over FY13-15 as the greenfield expansion plans come on-stream.
Projects pushed back, estimates cut to factor execution delays; maintain Buy
We revisit our volume assumptions and scale back our FY12/13 aluminium volumes by 6%/13%
to factor in delays. The wait has become particularly elongated due to the greenfield nature of
operations and the inevitable difficulty the company is experiencing in executing projects in
remote places. We also raise copper smelting margins, which has improved near term. Our
EBITDA estimates fall 3%/10% for FY12/13 as a result of our model changes. As a result, our
target price falls to Rs277 (from Rs315)
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