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Annual report analysis
In FY11, Hindalco has reversed the goodwill impairment charge of Rs36bn
taken in FY09 due to which D/E is just 0.7x in FY11 despite much higher debt.
This has however brought down ROEs to single-digits in FY11. FCF was
negative in FY11 due to a sharp rise in capex. Coal costs rose sharply in India
impacting aluminium costs. There is no change to project timelines though
commentary on execution challenges remains negative. Commentary on
Novelis is optimistic. Hindalco is trading at a rich 7.3x FY13 EV/EBITDA if
current aluminium prices sustain. Maintain U-PF.
Networth gets a boost post reversal of goodwill impairment charge
In FY09, Hindalco had taken an impairment charge of Rs36bn (US$800m) on the
Novelis acquisition goodwill. Hindalco has now taken a view that the events of
FY09 are exceptional in nature and has reversed the impairment charge. As a
result, networth has risen 35% YoY in FY11 and consol net D/E is flat at 0.7x
despite 27% higher debt. This has however brought down ROE’s to single-digits.
FCF negative in FY11 and will remain so over FY12-13
Hindalco’s India capex more than doubled in FY11 as project execution picked-up
pace. This combined with higher working capital resulted in negative FCF in FY11.
We see Hindalco staying FCF negative over FY12-13 as well.
Coal costs show a sharp rise in FY11
Hindalco’s unit power costs saw a sharp 13% rise in FY11 thanks to higher coal
and furnace oil prices. Hindalco’s average purchase price of coal has risen 12% in
FY11, most likely due to widening e-auction premiums. Coal costs will rise further
in FY12 as Coal India has hiked prices for non-power customers like Hindalco by
30% in Feb-11. Hindalco’s cash cost of aluminium currently stands at US$1,600-
1,700/t – up from just US$900-1,000/t ten years back.
No change to project timelines; commentary on Novelis sanguine
Hindalco has maintained its commissioning targets for India Greenfield projects
but has highlighted that it is facing severe cost pressures and execution
challenges. We don’t rule out another round of delays/cost overruns in these
projects. Commentary on Novelis is fairly sanguine and the annual report
highlights the rising share of premium products in its sales. Novelis will spend
US$1.5bn in capex over the next three years to increase capacities, highlighting
management’s optimism for Novelis despite the worsening global macro situation.
In FY11, Novelis has paid US$1.7bn (which has been debt-funded) as “return of
capital” to Hindalco’s 100% subsidiary AV Minerals (Netherlands) B.V. Of this, AV
Minerals has used US$1.05bn to repay debt and has paid US$650m to Hindalco
India by way of reduction of the nominal value of its shares.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Annual report analysis
In FY11, Hindalco has reversed the goodwill impairment charge of Rs36bn
taken in FY09 due to which D/E is just 0.7x in FY11 despite much higher debt.
This has however brought down ROEs to single-digits in FY11. FCF was
negative in FY11 due to a sharp rise in capex. Coal costs rose sharply in India
impacting aluminium costs. There is no change to project timelines though
commentary on execution challenges remains negative. Commentary on
Novelis is optimistic. Hindalco is trading at a rich 7.3x FY13 EV/EBITDA if
current aluminium prices sustain. Maintain U-PF.
Networth gets a boost post reversal of goodwill impairment charge
In FY09, Hindalco had taken an impairment charge of Rs36bn (US$800m) on the
Novelis acquisition goodwill. Hindalco has now taken a view that the events of
FY09 are exceptional in nature and has reversed the impairment charge. As a
result, networth has risen 35% YoY in FY11 and consol net D/E is flat at 0.7x
despite 27% higher debt. This has however brought down ROE’s to single-digits.
FCF negative in FY11 and will remain so over FY12-13
Hindalco’s India capex more than doubled in FY11 as project execution picked-up
pace. This combined with higher working capital resulted in negative FCF in FY11.
We see Hindalco staying FCF negative over FY12-13 as well.
Coal costs show a sharp rise in FY11
Hindalco’s unit power costs saw a sharp 13% rise in FY11 thanks to higher coal
and furnace oil prices. Hindalco’s average purchase price of coal has risen 12% in
FY11, most likely due to widening e-auction premiums. Coal costs will rise further
in FY12 as Coal India has hiked prices for non-power customers like Hindalco by
30% in Feb-11. Hindalco’s cash cost of aluminium currently stands at US$1,600-
1,700/t – up from just US$900-1,000/t ten years back.
No change to project timelines; commentary on Novelis sanguine
Hindalco has maintained its commissioning targets for India Greenfield projects
but has highlighted that it is facing severe cost pressures and execution
challenges. We don’t rule out another round of delays/cost overruns in these
projects. Commentary on Novelis is fairly sanguine and the annual report
highlights the rising share of premium products in its sales. Novelis will spend
US$1.5bn in capex over the next three years to increase capacities, highlighting
management’s optimism for Novelis despite the worsening global macro situation.
In FY11, Novelis has paid US$1.7bn (which has been debt-funded) as “return of
capital” to Hindalco’s 100% subsidiary AV Minerals (Netherlands) B.V. Of this, AV
Minerals has used US$1.05bn to repay debt and has paid US$650m to Hindalco
India by way of reduction of the nominal value of its shares.
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