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Upgrade HNDL to OW with Revised PT of Rs170, implying ~35%
potential upside: HNDL has sharply underperformed peers and the broader
metals index, declining 50% YTD, as earlier in the year investors, in our view,
were disappointed by a likely change in project economics at the Mahan smelter
and increasing coal costs (relatively high over ownership did not help). We
believe post the turnaround at the 100% owned US subsidiary Novelis,
HNDL is not a pure aluminum play, with LME linked prices accounting
for only 29% of EBITDA compared to FY09 when they stood at 78%.
Adjusted leverage currently stands at 1.3x v/s 2.9x in FY09. As the recent
financial re-structuring proved, HNDL can make cash generated at Novelis
fungible via dividends. The much smaller India copper smelting business also
provides HNDL with LME de-linked cash flows, while the cash rich Australian
subsidiary, ABML ($139mn FY11 cash) in our view is well positioned to
leverage up and look at smaller copper assets as LME remains under pressure.
In our view, HNDL has a more stable cash flow/earnings profile and among the
better balance sheets currently in the Indian MM space. Current valuations at
4.2x adj. EV/EBITDA (we believe Goodwill in HNDL’s case relating to the
very profitable Novelis is at little risk) are 15% higher than trough GFC lows
(3.8x EV/EBITDA) and 34% below the last 10-year average. Given the LME
de-linked earnings stream of Novelis, we believe HNDL should trade at higher
multiples compared to its historical averages.
MTM, key assumptions, MMDR impact: HNDL is the least impacted by the
proposed MMDR bill (impacting EPS by only 5%), in our view. We build in
conservative cost and volume assumptions across key business segments for
HNDL (domestic and Novelis). While we build in a JPM LME forecast of
$2500/MT v/s current LME of $2200/MT, we also build in INR of Rs47 v/s the
current Rs49.2, much higher coal/power costs and significant discount for
domestic aluminum realizations compared to implied import parity prices. At
current LME, INR, Novelis profitability and MMDR bill, HNDL FY13E EPS
drops to Rs14.4 v/s JPMe Rs15.8 (9%). JPM EPS forecasts for FY12-13E are
15-20% below consensus. Key risks are a) collapse in Novelis end market
demand in cans and profitability; b) large delays in Utkal project and c) sharp
decline in LME aluminum prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Upgrade HNDL to OW with Revised PT of Rs170, implying ~35%
potential upside: HNDL has sharply underperformed peers and the broader
metals index, declining 50% YTD, as earlier in the year investors, in our view,
were disappointed by a likely change in project economics at the Mahan smelter
and increasing coal costs (relatively high over ownership did not help). We
believe post the turnaround at the 100% owned US subsidiary Novelis,
HNDL is not a pure aluminum play, with LME linked prices accounting
for only 29% of EBITDA compared to FY09 when they stood at 78%.
Adjusted leverage currently stands at 1.3x v/s 2.9x in FY09. As the recent
financial re-structuring proved, HNDL can make cash generated at Novelis
fungible via dividends. The much smaller India copper smelting business also
provides HNDL with LME de-linked cash flows, while the cash rich Australian
subsidiary, ABML ($139mn FY11 cash) in our view is well positioned to
leverage up and look at smaller copper assets as LME remains under pressure.
In our view, HNDL has a more stable cash flow/earnings profile and among the
better balance sheets currently in the Indian MM space. Current valuations at
4.2x adj. EV/EBITDA (we believe Goodwill in HNDL’s case relating to the
very profitable Novelis is at little risk) are 15% higher than trough GFC lows
(3.8x EV/EBITDA) and 34% below the last 10-year average. Given the LME
de-linked earnings stream of Novelis, we believe HNDL should trade at higher
multiples compared to its historical averages.
MTM, key assumptions, MMDR impact: HNDL is the least impacted by the
proposed MMDR bill (impacting EPS by only 5%), in our view. We build in
conservative cost and volume assumptions across key business segments for
HNDL (domestic and Novelis). While we build in a JPM LME forecast of
$2500/MT v/s current LME of $2200/MT, we also build in INR of Rs47 v/s the
current Rs49.2, much higher coal/power costs and significant discount for
domestic aluminum realizations compared to implied import parity prices. At
current LME, INR, Novelis profitability and MMDR bill, HNDL FY13E EPS
drops to Rs14.4 v/s JPMe Rs15.8 (9%). JPM EPS forecasts for FY12-13E are
15-20% below consensus. Key risks are a) collapse in Novelis end market
demand in cans and profitability; b) large delays in Utkal project and c) sharp
decline in LME aluminum prices.
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