Hindalco: TP: INR226 Buy : Motilal Oswal

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Projects delayed but business strong
Valuations attractive post underperformance
 HNDL's domestic projects delayed but core business is strong.
 Net debt to increase due to ongoing capex in green-field projects.
 Novelis on track to achieve targeted EBITDA of USD1.15b-1.2b.
 Projects still attractive and key to earnings growth. Maintain Buy.
Domestic projects delayed but business strong
Over the past decade, Hindalco's (HNDL) aluminum production capacity increased
at a CAGR of 8% to 506ktpa due to brown-field expansion at Renukoot in FY04 and
the merger of Indal in FY05. Although HNDL envisaged three green-field smelter
projects in Orissa, Jharkhand and Madha Pradesh and signed MoUs with the respective
state governments during 2005-06. The actual progress on these high margin projects
remained slow due to infrastructure bottlenecks, uncertain regulatory environment
and local law and order situation. Meanwhile, HNDL acquired flat rolled product
(FRP) producer Novelis, which strengthened its downstream business.
After HNDL turned around the Novelis business in FY10, the management expedited
the progress of the projects. Although the projects have seen time and cost overruns
over the past few years, they remain attractive as cost of production of marginal
producers increased due to rising coal and energy costs. With captive bauxite, the CoP
of alumina at Utkal is now likely to be USD140-150/ton (25% higher than earlier
estimated).
Although we do not expect production ramp-up in FY13, we expect alumina and
aluminum volumes to jump 60-65% YoY to 2.5mt and 962k tons respectively in FY14,
driving earnings growth.


Novelis on track to achieve targeted EBITDA of USD1.15b-1.2b
Novelis is on track to achieve targeted EBITDA of USD1.15b-1.2b through volume growth
and an improved product mix. As FRP demand remains strong, Novelis will invest USD1.5b
over 2-3 years to increase capacity by 33% to 4mtpa. Novelis identified key growth areas.
e.g. (1) It will expand can sheet capacity by investing USD300m in Pinda, Brazil to cater
to strong growth in South America; (2) The company announced a USD200m investment
in its North America units to increase automobile sheet capacity to cater to demand.
Novelis expects stable demand for cans (50-55% of revenue) and is experiencing positive
traction in demand from the automobile segment (15% of revenue).



Valuations attractive; Buy with target price of INR226
HDNL's earnings will post CAGR of 4.7% over FY11-13 as the benefit of ongoing expansion
in India and Novelis will kick-in only in FY14. Both RoE and RoCE will decline as production
will not ramp up until FY13 and the start of captive coal for Mahan may also get delayed.
After acquisition of Novelis, the stock began to trade at a discount to NAV. At CMP of
INR130, Hindalco now trades at a deep discount of 42% to NAV (taking into account
replacement costs for fixed assets).
Over FY07-11 HNDL was the worst performing stock, delivering zero returns. Although
Hindalco generated operating cash flow of INR243b and it used INR194b as organic
capex. A large part of this capex (INR131b) was in CWIP at the end of FY11. The IC/CE
ratio is declining after peaking in FY09 at 73%. This is dragging down RoCE.
HNDL raised INR122b through rights and QIP issues, of which INR117b (net return of
capital) was used mainly to acquire Novelis. Going forward, we expect RoIC to improve
slightly by 40bp to 16.2% in FY13 due to improved margins in the Indian business, but
RoCE will decline marginally by 30bp due to deteriorating IC/CE ratio, primarily due to
project delays.
Considering the improved pricing power for FRP producers in the industry and ongoing
investments by key players (Alcoa's recent announcement of USD300m capex in the US)
we believe Novelis is better placed to withstand economic uncertainty. The stock trades at
attractive valuations of 5.1x EV/EBITDA, 1.1x P/BV FY13E and a 42% discount to
NAV. We value the stock at INR226 based on 7x FY13E EBITDA. Maintain Buy.

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