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● Al has been supported by high energy and copper prices. However,
at the current LME the margin of safety is low, as current LME is at
87% of the cost curve (fig 1). At the worst of the crisis in the past
two decades, the third quartile Al producers made maximum annual
loss of 10% (fig 2) while average margin was 15%.
● Current cost curve has moved up by $150-200/t since the last
year due to energy and carbon-related costs. Thus, stable LME
should be $2300/t (15% margin) and worst case at $1800/t (10%
loss). LME may dip below $1800 for a temporary period but has
strong resistance at $1800 where half of capacity is loss making.
● EBITDA erosion of Indian producers is higher in a scenario of
declining LME as their cost base is more sticky due to cheaper
coal availability from Coal India where prices are less likely to
drop even if global energy prices are reducing. Every $100/t
change in LME impacts Hindalco’s valuation by Rs 7/share.
● We reduce our TP to Rs180 (from Rs235) as (1) FY12/13E EPS
cut by 8% due to Al price reduction from $2,600 to $2,400 and (2)
volume expansion related upside now taken out from target price.
What margin of safety is built in current Al LME?
Aluminium has been supported by high energy prices (one-third of
production cost) and copper prices (Al acts as substitute of copper).
However, at the current LME the margin of safety is low, as current
LME is at 87% of the cost curve (fig 1). At the worst of the crisis in the
last two decades, third quartile Al producers made maximum annual
loss of 10% (fig 2) while average margin was 15%.
The current average cost for third quartile is $2,150/t but that has
increased by $150-200/t since the last year due to energy and carbonrelated
costs. Therefore, a stable LME should be $2,300/t (15%
margin) and the worst case LME should be $1800/t (10% margin loss).
We admit that for a temporary period LME can decline below $1800/t
too but should bounce back as at $1,800, half of global capacity is
loss making
Cost base of Indian producers is more sticky than peers
EBITDA erosion of Indian producers is higher in a scenario of
declining LME as their cost base is more sticky due to cheaper coal
availability from Coal India where prices will not drop even if the global
energy prices are reducing. Every $100/t change in LME impacts
Hindalco’s valuation by Rs 7/share.
Utkal ramp up slower than expected
The conveyor belt for Utkal would be ready only by FY14 and till then
to meet alumina demand for Mahan smelter, trucks would be used to
bring down bauxite from the hills. We expect Mahan alumina
requirements to be met but anything more than that may become
difficult. Additionally, Mahan smelter may face problems on
procurement of coal for the next two years. As a result, we take off
upsides related to expansion projects from our target price.
Maintain OUTPERFORM; Target price reduced to Rs 180
FY12/13E EPS reduced by 8% each, as we reduce Al price
assumption from $2,600/t to $2,400/t and reduce our multiple from 7x
to 6x to remove the upside related to the expansion projects. As a
result, our target price reduces from Rs235 to Rs180/share.
1Q12 results in line; Al costs at ~$1760/t
1Q12 EBITDA was 2% lower than estimates. The Aluminium division’s
performance was better than expected, as COP was better than
expected at $1,760/t with full cost increase reflected from Coal India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Al has been supported by high energy and copper prices. However,
at the current LME the margin of safety is low, as current LME is at
87% of the cost curve (fig 1). At the worst of the crisis in the past
two decades, the third quartile Al producers made maximum annual
loss of 10% (fig 2) while average margin was 15%.
● Current cost curve has moved up by $150-200/t since the last
year due to energy and carbon-related costs. Thus, stable LME
should be $2300/t (15% margin) and worst case at $1800/t (10%
loss). LME may dip below $1800 for a temporary period but has
strong resistance at $1800 where half of capacity is loss making.
● EBITDA erosion of Indian producers is higher in a scenario of
declining LME as their cost base is more sticky due to cheaper
coal availability from Coal India where prices are less likely to
drop even if global energy prices are reducing. Every $100/t
change in LME impacts Hindalco’s valuation by Rs 7/share.
● We reduce our TP to Rs180 (from Rs235) as (1) FY12/13E EPS
cut by 8% due to Al price reduction from $2,600 to $2,400 and (2)
volume expansion related upside now taken out from target price.
What margin of safety is built in current Al LME?
Aluminium has been supported by high energy prices (one-third of
production cost) and copper prices (Al acts as substitute of copper).
However, at the current LME the margin of safety is low, as current
LME is at 87% of the cost curve (fig 1). At the worst of the crisis in the
last two decades, third quartile Al producers made maximum annual
loss of 10% (fig 2) while average margin was 15%.
The current average cost for third quartile is $2,150/t but that has
increased by $150-200/t since the last year due to energy and carbonrelated
costs. Therefore, a stable LME should be $2,300/t (15%
margin) and the worst case LME should be $1800/t (10% margin loss).
We admit that for a temporary period LME can decline below $1800/t
too but should bounce back as at $1,800, half of global capacity is
loss making
Cost base of Indian producers is more sticky than peers
EBITDA erosion of Indian producers is higher in a scenario of
declining LME as their cost base is more sticky due to cheaper coal
availability from Coal India where prices will not drop even if the global
energy prices are reducing. Every $100/t change in LME impacts
Hindalco’s valuation by Rs 7/share.
Utkal ramp up slower than expected
The conveyor belt for Utkal would be ready only by FY14 and till then
to meet alumina demand for Mahan smelter, trucks would be used to
bring down bauxite from the hills. We expect Mahan alumina
requirements to be met but anything more than that may become
difficult. Additionally, Mahan smelter may face problems on
procurement of coal for the next two years. As a result, we take off
upsides related to expansion projects from our target price.
Maintain OUTPERFORM; Target price reduced to Rs 180
FY12/13E EPS reduced by 8% each, as we reduce Al price
assumption from $2,600/t to $2,400/t and reduce our multiple from 7x
to 6x to remove the upside related to the expansion projects. As a
result, our target price reduces from Rs235 to Rs180/share.
1Q12 results in line; Al costs at ~$1760/t
1Q12 EBITDA was 2% lower than estimates. The Aluminium division’s
performance was better than expected, as COP was better than
expected at $1,760/t with full cost increase reflected from Coal India.
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