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Project upside still far away
We cut Hindalco’s FY12-14 EPS estimates by 8-12% factoring in CLSA’s
revised base metal and currency forecasts. FY13 will be a weak year as the
Mahan smelter is unlikely to add to PBT without captive alumina and coal.
Profitability should start improving in FY14 assuming Utkal gets
commissioned on time and approval for the Mahan coal block comes through
soon but the full benefit will show in earnings only in FY15 – too early to
factor in. We see further downside to earnings if current aluminium prices
sustain and believe that valuations at 0.7x FY12 P/B are not cheap enough in
the context of single-digit ROEs. We maintain U-PF.
Mahan smelter not likely to add to PBT in FY13
Hindalco’s new Mahan smelter (commissioning by end-FY12) will have to operate
using external alumina and coal in FY13 and we don’t see any accretion to PBT
from this project in FY13. Mahan will have to procure ~50% of its alumina needs
externally while getting the balance 50% from the surplus alumina from existing
refineries. Hindalco is hoping to get a tapering linkage from Coal India, but given
the latter’s production woes, we see Mahan depending on e-auction/imported coal
as well. We don’t expect Hindalco to delay Mahan’s commissioning and ramp-up in
FY13 given the high visibility of Utkal refinery coming online by FY14.
Benefits of Utkal & captive coal will fully reflect in earnings only by FY15
Utkal Alumina will get commissioned by early-FY14 and should boost Mahan’s
margins but any delay in ramp-up will mean that Mahan will have to depend on
external alumina even in FY14 and will be alumina self-sufficient only by FY15.
There is some chance of the Mahan coal block getting approval in the Oct-9
government meeting but the 15month mine development period will mean that
captive coal will be available partially in FY14 and fully only by FY15. We see risk
of further delays in the Utkal refinery and a longer mine development period for
the Mahan coal block and hence believe that it is too early to factor in FY15.
Cutting FY12-14 EPS by 8-12%; maintain U-PF
We cut FY12-14 EPS by 8-12% factoring in 2-12% lower aluminium prices, 6-8%
weaker rupee forecasts and 25% lower production in Mahan (in FY13). If current
spot LME aluminium prices and INR/USD rate sustains, our FY13 EPS will drop a
further 7%. Stock has come off sharply but we see downside risk to aluminium
prices and don’t believe that valuations at 0.7x FY12 P/B are at trough levels yet
(stock bottomed at 0.4x P/B in mid-2009). Global aluminium peers with similar
ROEs are trading at ~0.6x CY12 P/B. There could be meaningful upside on a 2-
year view, but there could be meaningful downside before attention moves to a 2-
year view. We maintain U-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Project upside still far away
We cut Hindalco’s FY12-14 EPS estimates by 8-12% factoring in CLSA’s
revised base metal and currency forecasts. FY13 will be a weak year as the
Mahan smelter is unlikely to add to PBT without captive alumina and coal.
Profitability should start improving in FY14 assuming Utkal gets
commissioned on time and approval for the Mahan coal block comes through
soon but the full benefit will show in earnings only in FY15 – too early to
factor in. We see further downside to earnings if current aluminium prices
sustain and believe that valuations at 0.7x FY12 P/B are not cheap enough in
the context of single-digit ROEs. We maintain U-PF.
Mahan smelter not likely to add to PBT in FY13
Hindalco’s new Mahan smelter (commissioning by end-FY12) will have to operate
using external alumina and coal in FY13 and we don’t see any accretion to PBT
from this project in FY13. Mahan will have to procure ~50% of its alumina needs
externally while getting the balance 50% from the surplus alumina from existing
refineries. Hindalco is hoping to get a tapering linkage from Coal India, but given
the latter’s production woes, we see Mahan depending on e-auction/imported coal
as well. We don’t expect Hindalco to delay Mahan’s commissioning and ramp-up in
FY13 given the high visibility of Utkal refinery coming online by FY14.
Benefits of Utkal & captive coal will fully reflect in earnings only by FY15
Utkal Alumina will get commissioned by early-FY14 and should boost Mahan’s
margins but any delay in ramp-up will mean that Mahan will have to depend on
external alumina even in FY14 and will be alumina self-sufficient only by FY15.
There is some chance of the Mahan coal block getting approval in the Oct-9
government meeting but the 15month mine development period will mean that
captive coal will be available partially in FY14 and fully only by FY15. We see risk
of further delays in the Utkal refinery and a longer mine development period for
the Mahan coal block and hence believe that it is too early to factor in FY15.
Cutting FY12-14 EPS by 8-12%; maintain U-PF
We cut FY12-14 EPS by 8-12% factoring in 2-12% lower aluminium prices, 6-8%
weaker rupee forecasts and 25% lower production in Mahan (in FY13). If current
spot LME aluminium prices and INR/USD rate sustains, our FY13 EPS will drop a
further 7%. Stock has come off sharply but we see downside risk to aluminium
prices and don’t believe that valuations at 0.7x FY12 P/B are at trough levels yet
(stock bottomed at 0.4x P/B in mid-2009). Global aluminium peers with similar
ROEs are trading at ~0.6x CY12 P/B. There could be meaningful upside on a 2-
year view, but there could be meaningful downside before attention moves to a 2-
year view. We maintain U-PF.
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