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Maintain Buy — We reiterate our Buy as: 1) The stock’s 30% fall YTD more than
accounts for plant delays and higher cost coal/petro derivatives; 2) The steady margin
profile of Novelis should sustain & is an attractive proposition; 3) Aluminium is our
preferred metal with downside cost support; 4) Copper TC/RCs likely to maintain firm
trends seen in the last few weeks (helps FY13 EPS); 5) We see high likelihood of the
uncertainty of Mahan captive coal lifting soon. This is our preferred Indian metal play.
Revising TP — Our cons FY12-13E EPS is cut 25/13% and we reduce TP to Rs234
(from Rs268) taking into account: 1) Delays in plant completion for Mahan/Utkal; 2)
Higher capex and higher debt levels for Utkal/Novelis (higher plant costs/planned
capex); 3) Higher interest costs. We continue to value Hindalco standalone at 8.5x PE
(Rs108) but roll forward to Sep12 (from Jun12) & other businesses at 7x EV/EBITDA
(Rs107). Our TP now includes an explicit value for the Mahan project (Rs18) where we
assume captive coal by FY14. If captive coal is unavailable, the TP falls to Rs213. At
our TP of Rs234, Hindalco would trade at 7.5x Sep12 EV/EBITDA and 13.5x PE.
Update on expansions — Hindalco is among the lowest-cost aluminium smelters
globally (capacity 500ktpa), with captive power, bauxite and 30% of its own coal.
Hindalco’s 359kt Mahan (M.P.) smelter is likely to be commissioned in end-CY11.
Capacity will rise to 917ktpa by FY13 (includes 48kt at Hirakud) and to 1.28mt in FY14
(adding on 359kt at Orissa). Its 1.5m tpa Utkal alumina project in Orissa is likely to be
commissioned by 2H2012. We assume delays beyond management announcements.
Novelis' strategy — 1) Enhancing volumes – plans to raise capacity from 3mt to 4mt
by FY16, with near-term growth of 3-4% pa; 2) Lowering costs – closing inefficient
operations and transfer of assets; 3) Product focus – on cans (58% of sales volumes)
where demand is fairly inelastic and on auto and industrial electronics. All of this should
enable steady margins, as a good complement to the parent’s commodity business.
Risks — Lower margins/volumes; Delays in captive coal; Rupee appreciation.
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 2016 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
(FY11 sales of 3.1m tonnes), and a leader in the can sheet market. Novelis' key
markets are North America and Europe (~70% of FY11 shipments) with the rest sold
in Asia and South America. Beverage and food cans are the biggest end-use market
for Novelis, accounting for ~58% of volumes.
Investment strategy
We rate Hindalco Buy/Medium Risk (1M). Aluminium is one of our preferred metals
and we expect it to trade around US$2,600/t through 2013. Two key issues will
determine the outlook: (1) Power cuts in China to lead to closure of old capacity and
production curtailments; (2) Potential for large level of inventory locked up in
financing deals to remain so for quite some time yet. Additionally, copper TC/RCs
should be higher in FY12 at 16c/lb and FY13 at US20c/lb – relative to margins in
FY11 (11c/lb). Contributing factors appear to be reduced copper smelter capability
and reduced copper concentrate demand in China/Japan. 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 and availability of captive coal for its Mahan project in
FY14. Novelis has performed well in FY11 with adj EBITDA/t of US$346. We
estimate adj. EBITDA of US$1.1bn in FY12 and US$1.2bn in FY13. 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 (~58% of volumes) continue to be a very stable
segment. 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 Rs234 is based on SOTP. To value Hindalco standalone we use
a P/E of 8.5x on Sep12 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 7x EV/EBITDA and we estimate EBITDA/tonne of US$355-360 in
FY12 and FY13. The valuation is at the upper end of average global multiples,
which range from 6x to 7x. We use EV/EBITDA (rather than P/E) because Novelis
has a high level of debt. Our TP now includes an explicit value for the Mahan
project (Rs18) where we assume captive coal by FY14. If captive coal is
unavailable, the TP falls to Rs213. At our target price, Hindalco would trade at a
7.5x Sep12 consolidated EV/EBITDA and 13.5x P/E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maintain Buy — We reiterate our Buy as: 1) The stock’s 30% fall YTD more than
accounts for plant delays and higher cost coal/petro derivatives; 2) The steady margin
profile of Novelis should sustain & is an attractive proposition; 3) Aluminium is our
preferred metal with downside cost support; 4) Copper TC/RCs likely to maintain firm
trends seen in the last few weeks (helps FY13 EPS); 5) We see high likelihood of the
uncertainty of Mahan captive coal lifting soon. This is our preferred Indian metal play.
Revising TP — Our cons FY12-13E EPS is cut 25/13% and we reduce TP to Rs234
(from Rs268) taking into account: 1) Delays in plant completion for Mahan/Utkal; 2)
Higher capex and higher debt levels for Utkal/Novelis (higher plant costs/planned
capex); 3) Higher interest costs. We continue to value Hindalco standalone at 8.5x PE
(Rs108) but roll forward to Sep12 (from Jun12) & other businesses at 7x EV/EBITDA
(Rs107). Our TP now includes an explicit value for the Mahan project (Rs18) where we
assume captive coal by FY14. If captive coal is unavailable, the TP falls to Rs213. At
our TP of Rs234, Hindalco would trade at 7.5x Sep12 EV/EBITDA and 13.5x PE.
Update on expansions — Hindalco is among the lowest-cost aluminium smelters
globally (capacity 500ktpa), with captive power, bauxite and 30% of its own coal.
Hindalco’s 359kt Mahan (M.P.) smelter is likely to be commissioned in end-CY11.
Capacity will rise to 917ktpa by FY13 (includes 48kt at Hirakud) and to 1.28mt in FY14
(adding on 359kt at Orissa). Its 1.5m tpa Utkal alumina project in Orissa is likely to be
commissioned by 2H2012. We assume delays beyond management announcements.
Novelis' strategy — 1) Enhancing volumes – plans to raise capacity from 3mt to 4mt
by FY16, with near-term growth of 3-4% pa; 2) Lowering costs – closing inefficient
operations and transfer of assets; 3) Product focus – on cans (58% of sales volumes)
where demand is fairly inelastic and on auto and industrial electronics. All of this should
enable steady margins, as a good complement to the parent’s commodity business.
Risks — Lower margins/volumes; Delays in captive coal; Rupee appreciation.
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 2016 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
(FY11 sales of 3.1m tonnes), and a leader in the can sheet market. Novelis' key
markets are North America and Europe (~70% of FY11 shipments) with the rest sold
in Asia and South America. Beverage and food cans are the biggest end-use market
for Novelis, accounting for ~58% of volumes.
Investment strategy
We rate Hindalco Buy/Medium Risk (1M). Aluminium is one of our preferred metals
and we expect it to trade around US$2,600/t through 2013. Two key issues will
determine the outlook: (1) Power cuts in China to lead to closure of old capacity and
production curtailments; (2) Potential for large level of inventory locked up in
financing deals to remain so for quite some time yet. Additionally, copper TC/RCs
should be higher in FY12 at 16c/lb and FY13 at US20c/lb – relative to margins in
FY11 (11c/lb). Contributing factors appear to be reduced copper smelter capability
and reduced copper concentrate demand in China/Japan. 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 and availability of captive coal for its Mahan project in
FY14. Novelis has performed well in FY11 with adj EBITDA/t of US$346. We
estimate adj. EBITDA of US$1.1bn in FY12 and US$1.2bn in FY13. 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 (~58% of volumes) continue to be a very stable
segment. 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 Rs234 is based on SOTP. To value Hindalco standalone we use
a P/E of 8.5x on Sep12 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 7x EV/EBITDA and we estimate EBITDA/tonne of US$355-360 in
FY12 and FY13. The valuation is at the upper end of average global multiples,
which range from 6x to 7x. We use EV/EBITDA (rather than P/E) because Novelis
has a high level of debt. Our TP now includes an explicit value for the Mahan
project (Rs18) where we assume captive coal by FY14. If captive coal is
unavailable, the TP falls to Rs213. At our target price, Hindalco would trade at a
7.5x Sep12 consolidated EV/EBITDA and 13.5x P/E.
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