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Hindalco Industries (HNDL)
Metals & Mining
Hindalco plant visit takeaways: Good execution. Key takeaways from a well
organized plant visit are (1) Hindalco is focused on optimizing product mix and
productivity improvement (10K tonnes increase in production in FY2012E likely) and
driving cost control at Renukoot operations and (2) Mahan greenfield smelter
accompanied by CPP while impressive on technology and scale faces risks of moderate
delays in commissioning and lacks visibility on coal sourcing. We maintain our ADD
rating on inexpensive valuations. Our fair value of Rs175 will reduce to Rs145 at spot
aluminium price (vs US$2,450/ tonne in our model )
Productivity improvement and cost optimization the focus of Renukoot operations
Hindalco operates 345ktpa smelter, 700 ktpa alumina refinery and 742MW CPP at Renukoot’s
integrated facility. Hindalco highlighted (1) increase in production of Renukoot smelter by 10K to
420K for FY2012E; (2) increase in production of value-added products; and (3) cost reduction
initiatives such as reduction in AUX consumption to 9% from 9.6% in power plant, reduction in
station heat rate to 2,600 from 2,660 as some of the ongoing initiatives. Some of these initiatives
will improve realizations and protect contribution despite increasing coal costs.
Hindalco has also adopted an optimum bauxite sourcing strategy by ensuring a balance between
extraction from own mines and third party purchase (70:30 mix currently). Hindalco indicates that
cost of purchased bauxite is lower with Madhya Pradesh as the primary source of third party
bauxite. The purchase cost of bauxite may increase in future with Sterlite attempting to source
bauxite from the market though Hindalco indicates that it is protected by long-term contracts with
miners.
Mahan Smelter—impressive but runs risk delay with no clarity on raw material sourcing
Hindalco has used AP30 smelting technology for Mahan aluminium smelter with pots current of
360kA and high current efficiency of 94.5%. Hindalco is setting up 2 pot rooms with 180 pots in
each line. Benefits of new smelter are high productivity, automation and low conversion costs.
Hindalco intends to start 40 pots by FY2012E, 180 by July 2012 and 360 by Jan 2013. Aluminium
production target is 5K, 204K and 350K for FY2012E, FY2013E and FY2014E, respectively.
Hindalco expects the first unit of 6X150 MW CPP to start generation by December 2011 with the
commissioning of subsequent units at one month intervals. While Hindalco has made good
progress, on the ground visit indicates that some of the targets may be aggressive.
However clarity on raw material sourcing mix is still limited. The company has pinned hopes on
tapering coal linkage for CPP, but the fall back option is either e-auctions or imports. Import may
not be feasible with the closest port Dhamra 900 kms away from smelter. Sourcing of alumina will
also be a challenge (current surplus of 150K) if Utkal’s commissioning is delayed. We estimate COP
of US$2100/ tonne on a steady state if Utkal does not come onstream and coal sourcing in 100%
on e-auction basis; the company may be barely EBITDA positive in such a case.
Further details on Mahan Aluminium Smelter and Mahan CPP
Mahan Aluminium Smelter
Hindalco expects to start one pot a day and start 40 pots by end-December 2011. This
will increase to 180 pots by July 2012
Hindalco is setting up two cast house facilities—1st cast house will have ingot/ Sow
capacity of 360K tonnes. Hindalco expects 2nd cast house to be commissioned after 20
months and will have wire rod making capacity of 80 ktpa and billet casting of 50 ktpa
Hindalco has already received 140 pot shells and expects the balance in due course
Mahan smelter compares favorably on all parameters including current (360kA), current
efficiency (94.5%) DC power consumption (13,300 units) and labor requirement
Hindalco expects cost of production at Mahan to be ~US$1750-1800/ tonne on a steady
state basis after assuming 60% coal for power plant from tapering linkage.
Mahan Captive Power Plant
Hindalco is setting up 900 MW (6X150 MW) captive power plant that will feed Mahan
Aluminium smelting operations
Hindalco expects hydro testing of the 1st unit to start in October 2011 and
synchronization and commissioning in December 2011. The company expects
commissioning of all units of CPP by June 2012, a tad aggressive target, in our view
Hindalco indicates that it has received BTG equipment for the first three units
Hindalco has made substantial progress in balance of parts (BOP). Coal handling is almost
ready. Ash handling plant may take ~2 months. The company expects cooling tower to
be ready by November. Demineralization plant is also completed
Hindalco has set up railway siding for transportation of coal, alumina and other raw
materials. The nearest railhead is located at Bargawan at a distance of about 2 kms from
the plant.
AUX consumption for this plant will likely be 10% and station heat rate of 2,300
Hindalco is pinning its hopes on coal block and tapering coal linkage for its CPP. In the
initial phase the company may buy coal from e-auction; Hindalco indicates that NCL
produces 60 mtpa of coal of which 6mtpa may be sold by CIL through e-auction route.
Note that Hindalco’s coal requirement in FY2013E may be 2mn tonnes and 3.6 mn
tonnes in FY2014E
Hindalco has entered into a PPA with MPSEB at Rs2.52/ unit. Hindalco has excess power
of 200 MW which it intends to sell. In has set up 125MVA evacuation line for selling
excess power
Further details from Renukoot smelter and alumina and Renusagar power plant
visit
Hindalco has applied to MOEF to increase aluminium smelting capacity to 475 ktpa.
Hindalco plans to increase FY2012E production from Renukoot smelter by 10K to 420K
tonnes in FY2012E. Hindalco also intends to increase production of value added products.
Hindalco has 2,139 pots and 11 lines operational in Renukoot
Renukoot smelter is sourcing alumina from Belgaum smelter due to a shortfall at its
alumina refinery
Hindalco has operative bauxite mines and tactically uses third party purchases. Hindalco
has operative mines in Chattisgarh, Jharkhand, Maharashtra and Orissa. In addition the
company purchases bauxite from miners in Madhya Pradhesh. Current mix of captive:
external market purchase is 70:30. Hindalco believes that the cost of purchase of bauxite
is not materially different from captive sourcing. Benefits of the captive mine are offset by
high labor cost.
Hindalco has applied for mining leases in Jharkhand, Chattisgarh and MP. Hindalco
expects to increase bauxite mine reserve to 25-45 years from current 15 years of alumina
production
Cost of production of alumina (including depreciation and transfer pricing of power and
caustic soda) is US$330/ tonne. Key cost components are bauxite accounting for 30% of
overall cost, energy 30% and caustic soda cost of 17% with the balance being
depreciation and O&M
Silica content in bauxite sourced for Renukoot alumina refinery is at 3.7%. This leads to
higher caustic soda consumption. A 0.01% change in silica leads to 2.7 liter change in
caustic soda cost. As compared to Renukoot, bauxite quality in Orissa for Utkal Alumina is
gibssite and has low silica content. This results in energy costs and savings in caustic soda
consumption.
Cost of power/ unit from Renusagar power plant (790 MW) is Rs2.2/ unit (including
depreciation). Cash cost will be ~Rs2/ unit in our view. Renusagar power plant sources
linkage coal from Krishanshila coal mine after Jhingurda mine was exhausted.
Krishnashila mine is ~8kms from the Renusagar power plant. Hindalco is in the process of
constructing a piped conveyor belt to transport coal to the power plant
Current cost of production of aluminium at Renukoot is ~US$1850/ tonne
Maintain ADD rating; TP of Rs175
We like Hindalco’s core business for low volatility and cost- competitiveness. However
investors may have to contend with two key negatives (1) likely delay in commissioning of
greenfield projects and potential escalation in project costs and (2) high though manageable
leverage. On the positive side, downside to aluminium prices is low and the stock builds in
significant correction to commodity prices. Our fair value of Rs175will reduce to Rs146 at
spot aluminium price versus US$2,400/ tonne assumed in our model.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HNDL)
Metals & Mining
Hindalco plant visit takeaways: Good execution. Key takeaways from a well
organized plant visit are (1) Hindalco is focused on optimizing product mix and
productivity improvement (10K tonnes increase in production in FY2012E likely) and
driving cost control at Renukoot operations and (2) Mahan greenfield smelter
accompanied by CPP while impressive on technology and scale faces risks of moderate
delays in commissioning and lacks visibility on coal sourcing. We maintain our ADD
rating on inexpensive valuations. Our fair value of Rs175 will reduce to Rs145 at spot
aluminium price (vs US$2,450/ tonne in our model )
Productivity improvement and cost optimization the focus of Renukoot operations
Hindalco operates 345ktpa smelter, 700 ktpa alumina refinery and 742MW CPP at Renukoot’s
integrated facility. Hindalco highlighted (1) increase in production of Renukoot smelter by 10K to
420K for FY2012E; (2) increase in production of value-added products; and (3) cost reduction
initiatives such as reduction in AUX consumption to 9% from 9.6% in power plant, reduction in
station heat rate to 2,600 from 2,660 as some of the ongoing initiatives. Some of these initiatives
will improve realizations and protect contribution despite increasing coal costs.
Hindalco has also adopted an optimum bauxite sourcing strategy by ensuring a balance between
extraction from own mines and third party purchase (70:30 mix currently). Hindalco indicates that
cost of purchased bauxite is lower with Madhya Pradesh as the primary source of third party
bauxite. The purchase cost of bauxite may increase in future with Sterlite attempting to source
bauxite from the market though Hindalco indicates that it is protected by long-term contracts with
miners.
Mahan Smelter—impressive but runs risk delay with no clarity on raw material sourcing
Hindalco has used AP30 smelting technology for Mahan aluminium smelter with pots current of
360kA and high current efficiency of 94.5%. Hindalco is setting up 2 pot rooms with 180 pots in
each line. Benefits of new smelter are high productivity, automation and low conversion costs.
Hindalco intends to start 40 pots by FY2012E, 180 by July 2012 and 360 by Jan 2013. Aluminium
production target is 5K, 204K and 350K for FY2012E, FY2013E and FY2014E, respectively.
Hindalco expects the first unit of 6X150 MW CPP to start generation by December 2011 with the
commissioning of subsequent units at one month intervals. While Hindalco has made good
progress, on the ground visit indicates that some of the targets may be aggressive.
However clarity on raw material sourcing mix is still limited. The company has pinned hopes on
tapering coal linkage for CPP, but the fall back option is either e-auctions or imports. Import may
not be feasible with the closest port Dhamra 900 kms away from smelter. Sourcing of alumina will
also be a challenge (current surplus of 150K) if Utkal’s commissioning is delayed. We estimate COP
of US$2100/ tonne on a steady state if Utkal does not come onstream and coal sourcing in 100%
on e-auction basis; the company may be barely EBITDA positive in such a case.
Further details on Mahan Aluminium Smelter and Mahan CPP
Mahan Aluminium Smelter
Hindalco expects to start one pot a day and start 40 pots by end-December 2011. This
will increase to 180 pots by July 2012
Hindalco is setting up two cast house facilities—1st cast house will have ingot/ Sow
capacity of 360K tonnes. Hindalco expects 2nd cast house to be commissioned after 20
months and will have wire rod making capacity of 80 ktpa and billet casting of 50 ktpa
Hindalco has already received 140 pot shells and expects the balance in due course
Mahan smelter compares favorably on all parameters including current (360kA), current
efficiency (94.5%) DC power consumption (13,300 units) and labor requirement
Hindalco expects cost of production at Mahan to be ~US$1750-1800/ tonne on a steady
state basis after assuming 60% coal for power plant from tapering linkage.
Mahan Captive Power Plant
Hindalco is setting up 900 MW (6X150 MW) captive power plant that will feed Mahan
Aluminium smelting operations
Hindalco expects hydro testing of the 1st unit to start in October 2011 and
synchronization and commissioning in December 2011. The company expects
commissioning of all units of CPP by June 2012, a tad aggressive target, in our view
Hindalco indicates that it has received BTG equipment for the first three units
Hindalco has made substantial progress in balance of parts (BOP). Coal handling is almost
ready. Ash handling plant may take ~2 months. The company expects cooling tower to
be ready by November. Demineralization plant is also completed
Hindalco has set up railway siding for transportation of coal, alumina and other raw
materials. The nearest railhead is located at Bargawan at a distance of about 2 kms from
the plant.
AUX consumption for this plant will likely be 10% and station heat rate of 2,300
Hindalco is pinning its hopes on coal block and tapering coal linkage for its CPP. In the
initial phase the company may buy coal from e-auction; Hindalco indicates that NCL
produces 60 mtpa of coal of which 6mtpa may be sold by CIL through e-auction route.
Note that Hindalco’s coal requirement in FY2013E may be 2mn tonnes and 3.6 mn
tonnes in FY2014E
Hindalco has entered into a PPA with MPSEB at Rs2.52/ unit. Hindalco has excess power
of 200 MW which it intends to sell. In has set up 125MVA evacuation line for selling
excess power
Further details from Renukoot smelter and alumina and Renusagar power plant
visit
Hindalco has applied to MOEF to increase aluminium smelting capacity to 475 ktpa.
Hindalco plans to increase FY2012E production from Renukoot smelter by 10K to 420K
tonnes in FY2012E. Hindalco also intends to increase production of value added products.
Hindalco has 2,139 pots and 11 lines operational in Renukoot
Renukoot smelter is sourcing alumina from Belgaum smelter due to a shortfall at its
alumina refinery
Hindalco has operative bauxite mines and tactically uses third party purchases. Hindalco
has operative mines in Chattisgarh, Jharkhand, Maharashtra and Orissa. In addition the
company purchases bauxite from miners in Madhya Pradhesh. Current mix of captive:
external market purchase is 70:30. Hindalco believes that the cost of purchase of bauxite
is not materially different from captive sourcing. Benefits of the captive mine are offset by
high labor cost.
Hindalco has applied for mining leases in Jharkhand, Chattisgarh and MP. Hindalco
expects to increase bauxite mine reserve to 25-45 years from current 15 years of alumina
production
Cost of production of alumina (including depreciation and transfer pricing of power and
caustic soda) is US$330/ tonne. Key cost components are bauxite accounting for 30% of
overall cost, energy 30% and caustic soda cost of 17% with the balance being
depreciation and O&M
Silica content in bauxite sourced for Renukoot alumina refinery is at 3.7%. This leads to
higher caustic soda consumption. A 0.01% change in silica leads to 2.7 liter change in
caustic soda cost. As compared to Renukoot, bauxite quality in Orissa for Utkal Alumina is
gibssite and has low silica content. This results in energy costs and savings in caustic soda
consumption.
Cost of power/ unit from Renusagar power plant (790 MW) is Rs2.2/ unit (including
depreciation). Cash cost will be ~Rs2/ unit in our view. Renusagar power plant sources
linkage coal from Krishanshila coal mine after Jhingurda mine was exhausted.
Krishnashila mine is ~8kms from the Renusagar power plant. Hindalco is in the process of
constructing a piped conveyor belt to transport coal to the power plant
Current cost of production of aluminium at Renukoot is ~US$1850/ tonne
Maintain ADD rating; TP of Rs175
We like Hindalco’s core business for low volatility and cost- competitiveness. However
investors may have to contend with two key negatives (1) likely delay in commissioning of
greenfield projects and potential escalation in project costs and (2) high though manageable
leverage. On the positive side, downside to aluminium prices is low and the stock builds in
significant correction to commodity prices. Our fair value of Rs175will reduce to Rs146 at
spot aluminium price versus US$2,400/ tonne assumed in our model.
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