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Hindalco Industries (HALC.BO)
Buy: Top Pick; Mahan Coal Remains Key
Maintain Buy; top pick — Hindalco has corrected 39% YTD, discounting plant delays,
lack of visibility on the Mahan coal block clearance and higher cost coal/petro
derivatives. We believe the correction is overdone (aluminium LME prices are down 2%
YTD) and maintain Buy (though we cut TP) as: 1) Aluminium is our preferred metal with
downside cost support; 2) Novelis has a steady margin profile/cashflows; 3) Hindalco
offers strong volume growth as aluminium capacity should rise 152% to 1.28mtpa by
end-CY12 (though coal availability remains a risk for the Mahan smelter in M.P.)
Aluminium: preferred base metal — Our global commodities team has cut FY12
aluminium prices by 13% to $2,411/t and 11% for FY13 to $2,369/t but is relatively
positive. Demand has been strong, particularly in China where some production cuts
(power shortages/smelter maintenance) have tightened the market considerably. Below
$2,300/t, a significant number of producers would make losses and we could expect
production cuts. With interest rates set to remain extremely low for at least 2 years,
inventory financing deals will likely be rolled. This should act to keep the price high.
Earnings; TP cut — We cut FY12-13E EPS by 10/25% and TP to Rs203 (from Rs234)
as we: 1) update FY11 annual report data; 2) incorporate revised LME forecasts; 3)
lower FY13E TC/RCs from 20 to 15c/lb; 4) raise Novelis’ FY12 EBITDA/t to $365 from
$355 ($384 in 1Q). We continue to value Hindalco standalone at 8.5x Sep12PE (Rs92)
& other businesses at 7x EV/EBITDA (Rs98). Our TP includes an explicit value for
Mahan (Rs13), where we assume captive coal by FY14. If captive coal is unavailable,
fair value would be Rs182. At TP, Hindalco would trade at 8.5x EV/EBITDA; 14.3x PE.
Novelis' strategy — 1) Enhancing volumes: capacity to rise from 3mt to 4mt by FY16,
with near-term growth of 3-4% pa; 2) Lowering costs: closing inefficient operations;
transfer of assets; 3) Product focus: on cans (58% of sales volumes) where demand is
fairly inelastic and on auto/electronics. All of this should enable steady margins.
Risks — Lower margins/volumes; Delays in captive coal; Rupee appreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HALC.BO)
Buy: Top Pick; Mahan Coal Remains Key
Maintain Buy; top pick — Hindalco has corrected 39% YTD, discounting plant delays,
lack of visibility on the Mahan coal block clearance and higher cost coal/petro
derivatives. We believe the correction is overdone (aluminium LME prices are down 2%
YTD) and maintain Buy (though we cut TP) as: 1) Aluminium is our preferred metal with
downside cost support; 2) Novelis has a steady margin profile/cashflows; 3) Hindalco
offers strong volume growth as aluminium capacity should rise 152% to 1.28mtpa by
end-CY12 (though coal availability remains a risk for the Mahan smelter in M.P.)
Aluminium: preferred base metal — Our global commodities team has cut FY12
aluminium prices by 13% to $2,411/t and 11% for FY13 to $2,369/t but is relatively
positive. Demand has been strong, particularly in China where some production cuts
(power shortages/smelter maintenance) have tightened the market considerably. Below
$2,300/t, a significant number of producers would make losses and we could expect
production cuts. With interest rates set to remain extremely low for at least 2 years,
inventory financing deals will likely be rolled. This should act to keep the price high.
Earnings; TP cut — We cut FY12-13E EPS by 10/25% and TP to Rs203 (from Rs234)
as we: 1) update FY11 annual report data; 2) incorporate revised LME forecasts; 3)
lower FY13E TC/RCs from 20 to 15c/lb; 4) raise Novelis’ FY12 EBITDA/t to $365 from
$355 ($384 in 1Q). We continue to value Hindalco standalone at 8.5x Sep12PE (Rs92)
& other businesses at 7x EV/EBITDA (Rs98). Our TP includes an explicit value for
Mahan (Rs13), where we assume captive coal by FY14. If captive coal is unavailable,
fair value would be Rs182. At TP, Hindalco would trade at 8.5x EV/EBITDA; 14.3x PE.
Novelis' strategy — 1) Enhancing volumes: capacity to rise from 3mt to 4mt by FY16,
with near-term growth of 3-4% pa; 2) Lowering costs: closing inefficient operations;
transfer of assets; 3) Product focus: on cans (58% of sales volumes) where demand is
fairly inelastic and on auto/electronics. All of this should enable steady margins.
Risks — Lower margins/volumes; Delays in captive coal; Rupee appreciation.
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