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Hindalco Industries: Project delays postpone catalysts; Neutral
Earnings leveraged to Aluminium prices
In our view, Hindalco’s earnings are highly leveraged to LME aluminium
prices – every 10% change in aluminium price will impact Hindalco’s
2012E EPS by 34% in a similar direction. YTD, LME aluminium prices are
flat (after rising by 13% to early May, prices have retracted). Our FY12E
price forecast is US$2,463/T vs the current spot of US$ 2,470/T. We
therefore see no potential upside risks to our average price
assumptions.
Project delays drive earnings cut
Hindalco is in the process of executing 3 mn tpa of alumina and 1 mn
tpa of aluminium capacity (with 100% raw material coverage) over the
next three years, through a mix of greenfield and low-cost brownfield
projects. With the recent announcement of delays in Mahan Aluminium
and Utkal Alumina, we cut our FY13E-14E EPS estimates by 16% /19% as
the volume growth from new capacities is now postponed to end-FY14E.
Novelis turnaround: cash flow and earnings accretive
Novelis, the wholly owned subsidiary of Hindalco, which is also the
world’s largest downstream flat rolled producer, has now turned around
completely and reported FY11 adjusted EBITDA of US$ 1.1bn and FCF of
US$ 310mn. It has announced capacity expansion projects entailing
capex spend of US$1.5 bn over three years to increase its capacity from
3 mn tpa to 4 mn tpa by FY16.
Novelis debt refinancing and dividend payment a major milestone
In FY11, Novelis refinanced the debt on its balance sheet with US$4.8bn
of new financing, and used US$1.7bn of the proceeds to pay dividends
to Hindalco. In effect, Hindalco has recouped almost 50% of the US$3.5
bn of equity it had injected into Novelis in 2007. We view this return of
capital and relaxation of covenants as strategic positives.
Copper smelting – to benefit from rise in TC/RC
The copper smelting business of Hindalco suffered a cooling tower
failure in FY11, which has since been repaired. We expect a 10% growth
in volumes in FY12E and gains from an improvement in TC/RC rates for
FY12 on smelter disruptions and disciplined buying from China.
Reasonable valuations
Notwithstanding recent underperformance, at FY12E EV/EBITDA of 5.9x
the stock is currently trading at about 15% premium to global average of
5.1X. We cut our 12-month P/B based target price to Rs 190 (from Rs
207) on lower BVPS from a lower-than-expected FY11 results and lower
P/B multiple of 1.2X (from 1.3X as we lower earnings/returns). We retain
our Neutral rating as there is limited upside potential to our target price.
Risks: Upside: stronger-than-expected aluminium price; Downside:
delays in execution of growth projects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries: Project delays postpone catalysts; Neutral
Earnings leveraged to Aluminium prices
In our view, Hindalco’s earnings are highly leveraged to LME aluminium
prices – every 10% change in aluminium price will impact Hindalco’s
2012E EPS by 34% in a similar direction. YTD, LME aluminium prices are
flat (after rising by 13% to early May, prices have retracted). Our FY12E
price forecast is US$2,463/T vs the current spot of US$ 2,470/T. We
therefore see no potential upside risks to our average price
assumptions.
Project delays drive earnings cut
Hindalco is in the process of executing 3 mn tpa of alumina and 1 mn
tpa of aluminium capacity (with 100% raw material coverage) over the
next three years, through a mix of greenfield and low-cost brownfield
projects. With the recent announcement of delays in Mahan Aluminium
and Utkal Alumina, we cut our FY13E-14E EPS estimates by 16% /19% as
the volume growth from new capacities is now postponed to end-FY14E.
Novelis turnaround: cash flow and earnings accretive
Novelis, the wholly owned subsidiary of Hindalco, which is also the
world’s largest downstream flat rolled producer, has now turned around
completely and reported FY11 adjusted EBITDA of US$ 1.1bn and FCF of
US$ 310mn. It has announced capacity expansion projects entailing
capex spend of US$1.5 bn over three years to increase its capacity from
3 mn tpa to 4 mn tpa by FY16.
Novelis debt refinancing and dividend payment a major milestone
In FY11, Novelis refinanced the debt on its balance sheet with US$4.8bn
of new financing, and used US$1.7bn of the proceeds to pay dividends
to Hindalco. In effect, Hindalco has recouped almost 50% of the US$3.5
bn of equity it had injected into Novelis in 2007. We view this return of
capital and relaxation of covenants as strategic positives.
Copper smelting – to benefit from rise in TC/RC
The copper smelting business of Hindalco suffered a cooling tower
failure in FY11, which has since been repaired. We expect a 10% growth
in volumes in FY12E and gains from an improvement in TC/RC rates for
FY12 on smelter disruptions and disciplined buying from China.
Reasonable valuations
Notwithstanding recent underperformance, at FY12E EV/EBITDA of 5.9x
the stock is currently trading at about 15% premium to global average of
5.1X. We cut our 12-month P/B based target price to Rs 190 (from Rs
207) on lower BVPS from a lower-than-expected FY11 results and lower
P/B multiple of 1.2X (from 1.3X as we lower earnings/returns). We retain
our Neutral rating as there is limited upside potential to our target price.
Risks: Upside: stronger-than-expected aluminium price; Downside:
delays in execution of growth projects.
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