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Hindalco Industries (HALC.BO)
Neutral Equity Research
Strength of the core operations offset by project delays
What's changed
We visited a few domestic aluminium facilities of Hindalco last week,
including the integrated works in Renukoot and the Mahan project site for
a greenfield smelter (359 ktpa) and captive power plant (900 MW).
Implications
Hindalco’s wholly owned subsidiary Novelis, which is the world’s largest
downstream flat rolled producer, enjoys a steady state conversion
business model. Novelis’s ongoing expansion projects will drive volume
growth only from FY15E-16E onwards. The copper smelting business in
India is not material from the overall margins and returns point of view.
Hence, the only growth lever for Hindalco – aside from LME aluminium
price - is visibility on volume growth from projects in India, in our view.
Delays in the implementation of growth projects and lack of forestry
approval for the Mahan coal block have been an overhang on Hindalco’s
stock for the past few months. While we come back confident that the
Mahan smelter is on track for commissioning from Dec 2011 onwards, we
are not sure about project break-even timelines and return ratios in the
near term. Sourcing of key feedstock - alumina (as Utkal Alumina project is
delayed, not expected to be commissioned before Dec 2012, in our view)
and coal for the captive power plant (Mahan coal block is delayed) from
alternate sources will render return ratios unattractive in the near term.
Valuation
We reduce our FY12/13/14 EPS estimates by 3%/8%/14% to factor in slower
than expected volume growth from new projects. We maintain our
Neutral rating and lower our 12-m P/B based TP to Rs170 (from Rs190) on
account of lower P/B multiple (1.1x from 1.2x on project delays).
Key risks
Upside: stronger than expected aluminium price; Downside: delays in
project execution.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Site visit enforces strength of aluminium operations
We visited Hindalco’s domestic aluminium facilities, including the integrated complex at
Renukoot and the site for greenfield aluminium complex at Mahan.
Key Takeaways – Renukoot Complex
Project Details: Renukoot is an integrated complex, housing a 700 ktpa alumina refinery,
345 ktpa aluminium smelter, 56.5 ktpa wire rod, 80 ktpa rolled products, 35 ktpa of
extrusion and 78 MW co-gen power plant. In addition, the captive power plant at
Renusagar houses 790 MW of power capacity.
Raw Materials: Renukoot alumina refinery procures about 70% of its bauxite requirement
from captive mines in Jharkhand and Chattisgarh. Balance 30% of requirement is met
from third party miners under long term agreements. Captive mines have a reserve life of
about 15 years. The company has applied for fresh mining leases in Chattisgarh and MP.
Capacity Expansion: Renukoot smelter has been producing well beyond its installed
capacity for last few years, and the management is working towards generating additional
volumes of 10 ktpa through debottlenecking initiatives, mainly by improving current
efficiency. The company has sought for Environmental Clearance from MoEF for
expanding the capacity at Renukoot to up to 476 ktpa of aluminium through
debottlenecking initiatives.
Captive Power: The CPP at Renusagar is amongst the most efficient power plants in the
country, operating at a PLF of 102%. Coal is sourced from a mix of linkage coal and open
market purchases (e-auction) along with the use of coal middlings (washery rejects).
Power generation cost is about Rs 2 / kwh.
Current COP : Alumina US$ 270 / T; Aluminium US$ 1750 / T.
Key Takeaways - Mahan Project:
Project Details: Hindalco is building a greenfield aluminium smelting facility at Mahan in
M.P. with a capacity of 359 ktpa and 900 MW (6 X 150 MW) CPP. The project is scheduled
to begin phased commissioning from Dec 2011 onwards – and the company is targeting a
volume of 5KT in FY12E and 204kT in FY13E.
Current Status: Severe rainfall and adverse weather conditions have delayed the project
by about 3 months, which is not significant, in our view. The entire project is scheduled to
be completed between June 2012 (CPP) and March 2013 (all 360 pots). The company is in
advanced stages of construction for both the power plant and the smelter. The project
team at the site stated that all major equipment has been delivered as per schedule, and
balance units are at shipment stages. Hydro testing of Unit 1 of CPP is expected soon and
synchronization is targeted by Dec 2011. The BTG for the CPP is supplied by BHEL and for
the smelter, the company is using state-of-the-art AP-36S technology from Pechiney. This
technology has advantages of better productivity, higher current efficiency (360 KA which
is scalable upto 395 kA), lower carbon consumption and lower manpower requirement
due to high levels of automation.
Project Challenges: While the smelter and CPP at Mahan seem to be in advanced stages
of construction, there still are concerns over uncertainties related to feedstock sourcing to
keep the economics of this project viable. Utkal Alumina project, which is supposed to
provide alumina for the Mahan smelter is delayed and is not expected to be
commissioned before Dec 2012, at best. So clearly, even for FY13E production of 204 kT
of aluminium, Hindalco will have to source 408 kT of alumina from alternate sources. The
project team stated that they have an option to get alumina from the Belgaum refinery of
Hindalco (345 ktpa capacity).
The Mahan Coal block (which is supposed to be the captive mine for the Mahan CPP to
Hindalco) is still awaiting Forest Clearance from MoEF, and even if they receive the
necessary regulatory approvals, it will take about 15 – 18 months for mining operations to
commence coal supplies. In the interim, the CPP will have to rely upon open market
purchases (e-auction), or imported sources (but the freight cost will be prohibitive given
that the nearest port of Dhamra is 900 kms away). While the company has also applied for
a tapering linkage (approved by the CEA) with Coal India, there is no clarity on the status
of this application.
Hence, we believe that with external purchases of coal and sourcing alumina from far
fetched distances may stretch the Mahan smelter breaking even in FY13E (even if the
commissioning is on time)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HALC.BO)
Neutral Equity Research
Strength of the core operations offset by project delays
What's changed
We visited a few domestic aluminium facilities of Hindalco last week,
including the integrated works in Renukoot and the Mahan project site for
a greenfield smelter (359 ktpa) and captive power plant (900 MW).
Implications
Hindalco’s wholly owned subsidiary Novelis, which is the world’s largest
downstream flat rolled producer, enjoys a steady state conversion
business model. Novelis’s ongoing expansion projects will drive volume
growth only from FY15E-16E onwards. The copper smelting business in
India is not material from the overall margins and returns point of view.
Hence, the only growth lever for Hindalco – aside from LME aluminium
price - is visibility on volume growth from projects in India, in our view.
Delays in the implementation of growth projects and lack of forestry
approval for the Mahan coal block have been an overhang on Hindalco’s
stock for the past few months. While we come back confident that the
Mahan smelter is on track for commissioning from Dec 2011 onwards, we
are not sure about project break-even timelines and return ratios in the
near term. Sourcing of key feedstock - alumina (as Utkal Alumina project is
delayed, not expected to be commissioned before Dec 2012, in our view)
and coal for the captive power plant (Mahan coal block is delayed) from
alternate sources will render return ratios unattractive in the near term.
Valuation
We reduce our FY12/13/14 EPS estimates by 3%/8%/14% to factor in slower
than expected volume growth from new projects. We maintain our
Neutral rating and lower our 12-m P/B based TP to Rs170 (from Rs190) on
account of lower P/B multiple (1.1x from 1.2x on project delays).
Key risks
Upside: stronger than expected aluminium price; Downside: delays in
project execution.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Site visit enforces strength of aluminium operations
We visited Hindalco’s domestic aluminium facilities, including the integrated complex at
Renukoot and the site for greenfield aluminium complex at Mahan.
Key Takeaways – Renukoot Complex
Project Details: Renukoot is an integrated complex, housing a 700 ktpa alumina refinery,
345 ktpa aluminium smelter, 56.5 ktpa wire rod, 80 ktpa rolled products, 35 ktpa of
extrusion and 78 MW co-gen power plant. In addition, the captive power plant at
Renusagar houses 790 MW of power capacity.
Raw Materials: Renukoot alumina refinery procures about 70% of its bauxite requirement
from captive mines in Jharkhand and Chattisgarh. Balance 30% of requirement is met
from third party miners under long term agreements. Captive mines have a reserve life of
about 15 years. The company has applied for fresh mining leases in Chattisgarh and MP.
Capacity Expansion: Renukoot smelter has been producing well beyond its installed
capacity for last few years, and the management is working towards generating additional
volumes of 10 ktpa through debottlenecking initiatives, mainly by improving current
efficiency. The company has sought for Environmental Clearance from MoEF for
expanding the capacity at Renukoot to up to 476 ktpa of aluminium through
debottlenecking initiatives.
Captive Power: The CPP at Renusagar is amongst the most efficient power plants in the
country, operating at a PLF of 102%. Coal is sourced from a mix of linkage coal and open
market purchases (e-auction) along with the use of coal middlings (washery rejects).
Power generation cost is about Rs 2 / kwh.
Current COP : Alumina US$ 270 / T; Aluminium US$ 1750 / T.
Key Takeaways - Mahan Project:
Project Details: Hindalco is building a greenfield aluminium smelting facility at Mahan in
M.P. with a capacity of 359 ktpa and 900 MW (6 X 150 MW) CPP. The project is scheduled
to begin phased commissioning from Dec 2011 onwards – and the company is targeting a
volume of 5KT in FY12E and 204kT in FY13E.
Current Status: Severe rainfall and adverse weather conditions have delayed the project
by about 3 months, which is not significant, in our view. The entire project is scheduled to
be completed between June 2012 (CPP) and March 2013 (all 360 pots). The company is in
advanced stages of construction for both the power plant and the smelter. The project
team at the site stated that all major equipment has been delivered as per schedule, and
balance units are at shipment stages. Hydro testing of Unit 1 of CPP is expected soon and
synchronization is targeted by Dec 2011. The BTG for the CPP is supplied by BHEL and for
the smelter, the company is using state-of-the-art AP-36S technology from Pechiney. This
technology has advantages of better productivity, higher current efficiency (360 KA which
is scalable upto 395 kA), lower carbon consumption and lower manpower requirement
due to high levels of automation.
Project Challenges: While the smelter and CPP at Mahan seem to be in advanced stages
of construction, there still are concerns over uncertainties related to feedstock sourcing to
keep the economics of this project viable. Utkal Alumina project, which is supposed to
provide alumina for the Mahan smelter is delayed and is not expected to be
commissioned before Dec 2012, at best. So clearly, even for FY13E production of 204 kT
of aluminium, Hindalco will have to source 408 kT of alumina from alternate sources. The
project team stated that they have an option to get alumina from the Belgaum refinery of
Hindalco (345 ktpa capacity).
The Mahan Coal block (which is supposed to be the captive mine for the Mahan CPP to
Hindalco) is still awaiting Forest Clearance from MoEF, and even if they receive the
necessary regulatory approvals, it will take about 15 – 18 months for mining operations to
commence coal supplies. In the interim, the CPP will have to rely upon open market
purchases (e-auction), or imported sources (but the freight cost will be prohibitive given
that the nearest port of Dhamra is 900 kms away). While the company has also applied for
a tapering linkage (approved by the CEA) with Coal India, there is no clarity on the status
of this application.
Hence, we believe that with external purchases of coal and sourcing alumina from far
fetched distances may stretch the Mahan smelter breaking even in FY13E (even if the
commissioning is on time)
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