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Risk-reward still unfavourable
We cut Hindalco’s F12-13 EPS by 11-16% factoring in the revised base metal
price forecasts of CLSA’s resources team, higher India costs and lower volume
growth in Novelis. If current LME aluminium prices sustain through FY12-13,
our EPS estimates will get cut by a further 11-33%. With most India projects
delayed till FY14 and no resolution of the Mahan coal block issue, there is no
respite from company specific factors and we believe that it is too early to
look at FY14. We maintain U-PF on Hindalco with a target price of Rs120.
Modest cut to aluminium price forecasts
CLSA’s resources team has cut CY11-13 price forecasts for aluminium by 2-4%.
This factors in a limited impact of a potential QE3 and gives a higher weight to
market fundamentals. Our new aluminium forecasts are 5-10% above LME spot
prices. Our resources team believes that RMB appreciation and a rising Chinese
cost curve will provide support to aluminium prices.
Cutting volume growth in Novelis as well
Demand outlook in the western world has weakened given rising sovereign risk
issues in Europe and a slowing US economy. We cut FY12-13 volume growth for
Novelis to 3% from 5% factoring in lower western world demand. We note that
cans now constitute a high 57% of volumes for Novelis and will buffer volumes
since this segment is less at risk from a slow economy. We assume Novelis to
maintain current high margins given improving demand-supply in the can market.
Cutting FY12-13 EPS by 11-16%
We cut FY12-13 EPS by 11-16% factoring in the lower aluminium price forecasts,
lower volumes in Novelis as well as higher costs in India, Hindalco’s India cost
structure has worsened in the last two years and the company’s India profits are
more sensitive to aluminium price changes than before. We note that if current
aluminium prices sustain through FY13, our FY13 EPS will fall by a further 33%.
Risk-reward remains unfavourable; maintain U-PF
Hindalco’s India alumina/aluminium projects are already delayed by 3-15m and
management highlights continuing execution challenges in these projects. We
assume Mahan to get commissioned by early-FY13 but this project is unlikely to
make any money in FY13 given dependence on external alumina and coal. FY14
should be a better year with Utkal Alumina getting commissioned but is too early
to factor in given risk of more delays and near-term macro uncertainties. As a
result, we don’t see any earnings growth over FY11-13 with risk of more
downside. Valuations at 1.2x FY12 P/B are not cheap enough. We maintain U-PF
with a target price of Rs120 at 5.5x FY13 EV/EBITDA (6.5x previously).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Risk-reward still unfavourable
We cut Hindalco’s F12-13 EPS by 11-16% factoring in the revised base metal
price forecasts of CLSA’s resources team, higher India costs and lower volume
growth in Novelis. If current LME aluminium prices sustain through FY12-13,
our EPS estimates will get cut by a further 11-33%. With most India projects
delayed till FY14 and no resolution of the Mahan coal block issue, there is no
respite from company specific factors and we believe that it is too early to
look at FY14. We maintain U-PF on Hindalco with a target price of Rs120.
Modest cut to aluminium price forecasts
CLSA’s resources team has cut CY11-13 price forecasts for aluminium by 2-4%.
This factors in a limited impact of a potential QE3 and gives a higher weight to
market fundamentals. Our new aluminium forecasts are 5-10% above LME spot
prices. Our resources team believes that RMB appreciation and a rising Chinese
cost curve will provide support to aluminium prices.
Cutting volume growth in Novelis as well
Demand outlook in the western world has weakened given rising sovereign risk
issues in Europe and a slowing US economy. We cut FY12-13 volume growth for
Novelis to 3% from 5% factoring in lower western world demand. We note that
cans now constitute a high 57% of volumes for Novelis and will buffer volumes
since this segment is less at risk from a slow economy. We assume Novelis to
maintain current high margins given improving demand-supply in the can market.
Cutting FY12-13 EPS by 11-16%
We cut FY12-13 EPS by 11-16% factoring in the lower aluminium price forecasts,
lower volumes in Novelis as well as higher costs in India, Hindalco’s India cost
structure has worsened in the last two years and the company’s India profits are
more sensitive to aluminium price changes than before. We note that if current
aluminium prices sustain through FY13, our FY13 EPS will fall by a further 33%.
Risk-reward remains unfavourable; maintain U-PF
Hindalco’s India alumina/aluminium projects are already delayed by 3-15m and
management highlights continuing execution challenges in these projects. We
assume Mahan to get commissioned by early-FY13 but this project is unlikely to
make any money in FY13 given dependence on external alumina and coal. FY14
should be a better year with Utkal Alumina getting commissioned but is too early
to factor in given risk of more delays and near-term macro uncertainties. As a
result, we don’t see any earnings growth over FY11-13 with risk of more
downside. Valuations at 1.2x FY12 P/B are not cheap enough. We maintain U-PF
with a target price of Rs120 at 5.5x FY13 EV/EBITDA (6.5x previously).
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