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We recently visited HNDL’s flagship aluminum smelting complex at Renukoot
and also visited the upcoming smelter at Mahan. Here are the key takeaways from
our visit.
Mahan: New smelter details- Construction work is in full swing at the smelter
(AP36S) and considerable progress has been made on the 359kt smelter and the
150MWX6 power project. The project area is ~5000acres and HNDL, in the
future, can look at installing another smelter with similar power capacity. The
smelter consists of 2 pot-lines of 180 pots each. Currently ~10,000 workers
are on site of the smelter with work going on the cast house, colony, power
plants the pot lines and railway siding.
Timelines: As per HNDL, the first 40 pots would be ready by Dec-11 and
commissioning process will start. The second phase of 140 pots is scheduled
for commissioning by April-July 12 with the final commissioning of all the
360 pots by Dec 2012-Jan 2013. The next 2 months are critical for Mahan to
be able achieve first metal tapping by Dec-11E end. While the company has
an aggressive timeline for commissioning the smelter, we expect FY13E
production (and capacity utilization) from the new smelter to be muted given
technology stabilization. In our view, production near the rated capacity is
likely only in FY14E (assuming no delays in the above timelines). Power plants
can accept coal with a median calorific value of 3,490.
Alumina, coal and COP: HNDL expects to source most of the required
alumina in FY13E from its own surplus (we estimate HNDL is net long alumina
including specialty alumina of 250-300KT) and possibly look at imports
depending on smelter ramp up. In FY14E, HNDL expects to feed Mahan from
Utkal alumina refinery. Coal remains a key issue. While HNDL is hopeful of
eventually getting Mahan coal block (next GOM meeting in Oct), even
assuming approval, and production would take 15 months. Assuming no
approval, HNDL is relying on tapering linkage, which given Coal India’s
production problems, we are not very confident of this. As of now HNDL
would look to source coal from the market. Understandably HNDL did not
give out many details on the expected CoP at Mahan given the moving parts of
coal and alumina. We estimate current CoP at Renukoot in the $1700-1750/MT
range and Mahan FY13E CoP should be higher given it is a ramp up year, but
eventually Mahan should be lower than Renukoot, assuming Utkal alumina and
no spike in e-auction coal prices from current levels.
Our earnings estimates remain unchanged but are under review.
Impressive in our view
Mahan v/s Renukoot: The labor cost/MT is likely to be a sixth of Renukoot as
significantly lower manpower would be required at Mahan given the very high level
of automation. Power consumption/MT of aluminum is expected at 13,420 units,
compared to ~15,000 units at Renukoot. The metal production at Mahan would be
2.7MT per pot per day versus 0.7MT per pot per day.
Renukoot- Continuous improvement drives savings: The asset sweating of
Renukoot is impressive in our view, with the smelter delivering 2-3% higher
volumes every year, while continuously working at cost savings. Currently Renukoot
sources 30% of its bauxite from 3rd party mines and 70% is captive. We estimate
alumina CoP at Renukoot at $270/MT currently. Renukoot’s VAP product portfolio
is highly profitable, in our view.
Impressive CSR activities: We also saw HNDL’s CSR activities in the neighboring
region, including primary school, village and medical facility for the local
population. The houses provided by HNDL to the affected people of Mahan site are
impressive, in our view.
Execution bottlenecks- A first hand experience of the roads and the impact: Our
site visit helped us appreciate the execution issues faced by HNDL in particular and
generally by companies with industrial projects in that area, even after the 2 big
issues- land acquisition and MOEF clearances were received. The condition of the
state highways (2 lanes) was not conducive for moving heavy traffic of trucks.
Many industrial projects are now coming up/already there from the stretch
starting from Renukoot in UP, going into MP (as it is a coal rich belt). We came
across exiting/in work projects of aluminum (HNDL) at Renukoot, power
(HNDL) Renusagar, then moving further down power plants from UPSEB,
Lanco, Mahan aluminum and power, Essar Energy. We heard from locals that
power projects of Reliance and other companies were also near by. All the
projects are essentially being serviced by the same state highways with heavy
industrial machinery moving by trucks. The other problem is the large
movement of coal by trucks for some of the power projects (e-auction coal
mainly). As more of the above projects come on stream, we believe the truck
movement to move coal to these projects is only going to materially increase
from here. The visit underscored the need to increase domestic coal production
and also to move the same by rail, as the road network is likely to come under
increasing stress.
Valuations and Key Risks
We remain Neutral on HNDL with a PT of Rs230 based on FY13 SOTP. We value
Novelis at 6.3x FY13 EV/EBITDA, our India ally multiple is 5.7x and India’s copper
operations at 4x. Key upside risks include: a) sharp increase in LME ally prices; b)
project commissioning and ramp up ahead of schedule; Key downside risks include
a) decline in LME ally prices given inventory surge; b) sharp increase in ally CoP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently visited HNDL’s flagship aluminum smelting complex at Renukoot
and also visited the upcoming smelter at Mahan. Here are the key takeaways from
our visit.
Mahan: New smelter details- Construction work is in full swing at the smelter
(AP36S) and considerable progress has been made on the 359kt smelter and the
150MWX6 power project. The project area is ~5000acres and HNDL, in the
future, can look at installing another smelter with similar power capacity. The
smelter consists of 2 pot-lines of 180 pots each. Currently ~10,000 workers
are on site of the smelter with work going on the cast house, colony, power
plants the pot lines and railway siding.
Timelines: As per HNDL, the first 40 pots would be ready by Dec-11 and
commissioning process will start. The second phase of 140 pots is scheduled
for commissioning by April-July 12 with the final commissioning of all the
360 pots by Dec 2012-Jan 2013. The next 2 months are critical for Mahan to
be able achieve first metal tapping by Dec-11E end. While the company has
an aggressive timeline for commissioning the smelter, we expect FY13E
production (and capacity utilization) from the new smelter to be muted given
technology stabilization. In our view, production near the rated capacity is
likely only in FY14E (assuming no delays in the above timelines). Power plants
can accept coal with a median calorific value of 3,490.
Alumina, coal and COP: HNDL expects to source most of the required
alumina in FY13E from its own surplus (we estimate HNDL is net long alumina
including specialty alumina of 250-300KT) and possibly look at imports
depending on smelter ramp up. In FY14E, HNDL expects to feed Mahan from
Utkal alumina refinery. Coal remains a key issue. While HNDL is hopeful of
eventually getting Mahan coal block (next GOM meeting in Oct), even
assuming approval, and production would take 15 months. Assuming no
approval, HNDL is relying on tapering linkage, which given Coal India’s
production problems, we are not very confident of this. As of now HNDL
would look to source coal from the market. Understandably HNDL did not
give out many details on the expected CoP at Mahan given the moving parts of
coal and alumina. We estimate current CoP at Renukoot in the $1700-1750/MT
range and Mahan FY13E CoP should be higher given it is a ramp up year, but
eventually Mahan should be lower than Renukoot, assuming Utkal alumina and
no spike in e-auction coal prices from current levels.
Our earnings estimates remain unchanged but are under review.
Impressive in our view
Mahan v/s Renukoot: The labor cost/MT is likely to be a sixth of Renukoot as
significantly lower manpower would be required at Mahan given the very high level
of automation. Power consumption/MT of aluminum is expected at 13,420 units,
compared to ~15,000 units at Renukoot. The metal production at Mahan would be
2.7MT per pot per day versus 0.7MT per pot per day.
Renukoot- Continuous improvement drives savings: The asset sweating of
Renukoot is impressive in our view, with the smelter delivering 2-3% higher
volumes every year, while continuously working at cost savings. Currently Renukoot
sources 30% of its bauxite from 3rd party mines and 70% is captive. We estimate
alumina CoP at Renukoot at $270/MT currently. Renukoot’s VAP product portfolio
is highly profitable, in our view.
Impressive CSR activities: We also saw HNDL’s CSR activities in the neighboring
region, including primary school, village and medical facility for the local
population. The houses provided by HNDL to the affected people of Mahan site are
impressive, in our view.
Execution bottlenecks- A first hand experience of the roads and the impact: Our
site visit helped us appreciate the execution issues faced by HNDL in particular and
generally by companies with industrial projects in that area, even after the 2 big
issues- land acquisition and MOEF clearances were received. The condition of the
state highways (2 lanes) was not conducive for moving heavy traffic of trucks.
Many industrial projects are now coming up/already there from the stretch
starting from Renukoot in UP, going into MP (as it is a coal rich belt). We came
across exiting/in work projects of aluminum (HNDL) at Renukoot, power
(HNDL) Renusagar, then moving further down power plants from UPSEB,
Lanco, Mahan aluminum and power, Essar Energy. We heard from locals that
power projects of Reliance and other companies were also near by. All the
projects are essentially being serviced by the same state highways with heavy
industrial machinery moving by trucks. The other problem is the large
movement of coal by trucks for some of the power projects (e-auction coal
mainly). As more of the above projects come on stream, we believe the truck
movement to move coal to these projects is only going to materially increase
from here. The visit underscored the need to increase domestic coal production
and also to move the same by rail, as the road network is likely to come under
increasing stress.
Valuations and Key Risks
We remain Neutral on HNDL with a PT of Rs230 based on FY13 SOTP. We value
Novelis at 6.3x FY13 EV/EBITDA, our India ally multiple is 5.7x and India’s copper
operations at 4x. Key upside risks include: a) sharp increase in LME ally prices; b)
project commissioning and ramp up ahead of schedule; Key downside risks include
a) decline in LME ally prices given inventory surge; b) sharp increase in ally CoP.
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