Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hindalco Industries
B enefits of Mahan expansion from FY14
Event: site visit to Mahan & Renukoot facilities—construction in progress
1) Hindalco expects to part commission (40 of 360 smelting pots at Mahan) by
December 2011 and the remaining by March 2013; full ramp-up in FY14. 2)
Management is optimistic that the Mahan coal block will be allotted; a key
decision is expected at the 8 October GoM meeting. 3) Cost of Production (CoP) at
Mahan could be as high as US$2,100/t without captive coal and bauxite from
Utkal; 4) Renukoot Al CoP is US$1,750/t and Alumina CoP is at US$270/t.
Impact: volume growth from Mahan/Utkal from FY14
We lower our alumina/aluminium volumes production and sales assumptions as: 1)
we forecast Mahan to contribute only 150kt in FY13 and fully ramp-up (359ktpa
capacity) in FY14; and 2) we forecast the Utkal refinery to start producing from
FY14. We assume Mahan will start contributing to earnings from FY14 given
ramp-up costs will be high in FY13. We also lower average blended ASP forecasts
for the aluminium business (assume slower ramp-up in downstream capacities as
well).
Action: cut consolidated FY13E/14E EBITDA 15%/20%; coal remains key
We lower our consolidated EBITDA estimates by 15-20% in FY13/14 and our EPS
estimates by 33-36% driven by a reduction in standalone EBITDA estimates by
33%/38% (by Rs16/27bn). At the current aluminium price of cUS$2,200, no
captive/linkage coal, and partial bauxite sourcing from third-party sources, Mahan
is unlikely to contribute positively.
Valuation: Buy with a price target of Rs180 (earlier Rs240)
We have a new sum-of-the-parts-based price target of Rs180 for Hindalco. We
value Hindalco’s Indian business at 5x FY13E EBITDA and Novelis at 6x FY13E
EBITDA and listed subsidiaries/investments at a 20/50% discount to market price.
Key reasons why we like Hindalco
1. We are positive on aluminium prices given current spot price is very
close to the marginal CoP (US$2,150-2,200/t)—hence, we see limited
downside to earnings.
2. Secondly, Novelis is a stable earnings model—we expect EBITDA at
Novelis to increase from US$1bn to US$1.3bn between FY11-FY13
driven by volume growth and cost rationalisation.
3. We like the domestic expansion story though earnings impact will be
largely from FY14—Hindalco will see a sharp increase in earnings
given the strong pipeline of expansions—359ktpa smelter at Mahan,
1.5mt alumina refinery at Utkal, etc.
4. Although earnings from expansions will not accrue much in FY12-13,
we think Hindalco will have significant Capital Work in Progress
(CWIP) by end-FY12—US$4.3bn.
We lower our FY13E/14E earnings on capacity delays
We were earlier expecting the 359 ktpa Mahan project to be fully commissioned
by March 2012 and operate at c62%/100% capacity in FY13/14 (considering
FY13 as the ramp-up period).
Post our site visit and assessment of ground reality, we now expect the project to
be fully commissioned only by March 2013 and full volumes from Mahan to
only be reflected from FY14 onwards as H2 FY13 would be the ramp-up period.
We have not built in captive coal assumptions to our numbers.
We also defer the commissioning of the 359 ktpa Aditya smelter by six months
to October 2013.
We lower our alumina/aluminium volumes production and sales assumptions as:
1) we forecast Mahan to contribute only 150kt in FY13 and fully ramp-up
(359ktpa capacity) in FY14; and 2) we forecast the Utkal refinery to start
producing from FY14. We assume Mahan will start contributing to earnings
from FY14 given ramp-up costs will be high in FY13.
We also lower our average blended ASP forecasts for the aluminium business
(we assume slower ramp-up in downstream capacities as well). Hence, we lower
the standalone revenue estimates for FY12-14 by 3-13%, EBITDA estimates by
10-38%, and PAT estimates by 12-52%.
We raise our capex estimates for the standalone business—we now forecast
capex of US$2bn each in FY12/13, which increases the interest expenses.
Valuation
We maintain our Buy rating on Hindalco but lower our price target to Rs180
(from Rs240). This is led by:
A significant decline in earnings estimates for the standalone business from
Rs47.4bn to Rs31.6bn (in FY13)—this has led to a decline of Rs45 in the
price target. The decline in earnings in the standalone business is because we
assume no marginal contribution to earnings from Mahan in FY13. We
estimate Mahan and Utkal will start contributing to earnings from FY14.
We also lower the valuation multiple of the standalone businesses to 5x
(earlier 5.5x) on March 2013E EV/EBITDA and Novelis to 6x (earlier 6.5x)
EV/EBITDA given global headwinds in the commodity outlook.
We value investments in Aditya Birla Chemicals/Minerals at a 20% discount
to their market capitalisation, while long-term investments at a 50% discount
to their market capitalisation.
We value CWIP at 40% of FY12 estimate of US$4.3bn.
Other updates from the site visit
Renukoot Alumina Facility
Alumina CoP at Renukoot is US$270/ton
The cost breakdown:
— 30% is Bauxite (2.85t of alumina)
— 16% is Caustic soda (150kg required per tonne of alumina)
— 30% is Energy—power requirement is 330 kwh/ton of alumina
— Remaining 24% is towards wages, maintenance, depreciation, etc
The silica content of the Bauxite for the Renukoot facility is 3-3.5%, while that
in Orissa is 2.5%—lesser silica content means lesser requirement of caustic soda.
Renukoot Aluminium Complex
Hindalco's CoP at the Renukoot Aluminium complex is US$1,750/ton (as
against the current global marginal CoP of US$2200/tonne).
— 420 kg of carbon is required per tonne of aluminium (15:85 mix between
Pitch: CP Coke)—Hindalco buys Pitch/CP Coke from third-party
producers such as Himadri Chemicals, etc.
— Power requirement is 14,000 units/ton of Aluminium (15,000 units/ton
including auxiliary consumption). Power cost is Rs2.2/unit in the
Renukoot smelter, while Rs2.7/unit in the refinery.
Downstream costs
Conversion cost from molten metal to billets (billet capacity is 40kt tonne) is
Rs3,000/t (US$60/t)
— Conversion cost from molten metal to slabs is Rs6,000/t (US$120/t)
— Conversion cost from molten metal to rolled products is Rs10,000/t
(US$200/t).
Mahan’s economics
Based on the below key assumptions, Mahan’s CoP will be cUS$2,100-2,200/t,
contributing little to Hindalco’s earnings, assuming the current aluminium price
of cUS$2,200/t (this is not UBS forecast):
Mix of coal purchased from e-auction at a cost of Rs2,000/t and imported
coal
Half of the alumina requirement is sourced from Renukoot and the rest from
market purchases—blended cost of US$350/t including transportation.
Mahan CoP of Aluminium would be cUS$1,450/t if:
(1) The Mahan coal block is allotted and the 900 MW captive power plant
(CPP) generates power from the captive coal;
(2) Alumina is supplied from the Utkal refinery.
Alumina from Utkal is certain from FY14. However, the bigger variable and
higher uncertainty is with regard to the Mahan coal block allocation.
We believe that though there is some hope post the changes in the environment
ministry, approval of the Mahan coal block could be challenging. The new
minister is willing to look at the allotment of mines in forest areas on a case-bycase
basis.
Hindalco management expects a key decision to be taken on the Mahan block at
the 8 October meeting of the group of ministers (GoM) and are hopeful of a
positive outcome.
Assuming the GoM gives the consent for Mahan at its meeting, the company
will need about 1.5-2 years’ time to fully develop the mines and reach steadystate
production levels. Additionally, it looks unlikely that Hindalco will receive
tapering linkage coal from Coal India (which will be at a discounted/regulated
price of cUS$1000/t) any time soon. In any case (even assuming the Mahan coal
block is given clearance), Hindalco will have to buy coal from e-auction/import
at least until FY14.
We could witness a potential rally in the stock if the GoM announces a go-ahead
for the Mahan block, even though the full benefit of the block would only trickle
into earnings from FY14.
Hindalco Industries
Hindalco is the largest non-ferrous metal producer in India and is focused on the
production of aluminium and copper. It produces 345,000tpa of integrated
aluminium and 660,000tpa of alumina. Its downstream products include rolled,
aluminium foil, wire rods and alloy wheels. Hindalco plans to expand its copper
smelter production from 180,000 to 250,000tpa. It recently acquired two copper
mines, which could meet up to one-third of its concentrate requirements.
Hindalco's 97%-owned subsidiary Indal produces 110,000tpa of aluminium and
401,000tpa of alumina/alumina hydrate.
Statement of Risk
A sharp fall in global prices for aluminium, which in turn, is linked to the
recovery of the global economy, as well as continuing strong Chinese imports, is
the key risk factor for Indian aluminium companies
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hindalco Industries
B enefits of Mahan expansion from FY14
Event: site visit to Mahan & Renukoot facilities—construction in progress
1) Hindalco expects to part commission (40 of 360 smelting pots at Mahan) by
December 2011 and the remaining by March 2013; full ramp-up in FY14. 2)
Management is optimistic that the Mahan coal block will be allotted; a key
decision is expected at the 8 October GoM meeting. 3) Cost of Production (CoP) at
Mahan could be as high as US$2,100/t without captive coal and bauxite from
Utkal; 4) Renukoot Al CoP is US$1,750/t and Alumina CoP is at US$270/t.
Impact: volume growth from Mahan/Utkal from FY14
We lower our alumina/aluminium volumes production and sales assumptions as: 1)
we forecast Mahan to contribute only 150kt in FY13 and fully ramp-up (359ktpa
capacity) in FY14; and 2) we forecast the Utkal refinery to start producing from
FY14. We assume Mahan will start contributing to earnings from FY14 given
ramp-up costs will be high in FY13. We also lower average blended ASP forecasts
for the aluminium business (assume slower ramp-up in downstream capacities as
well).
Action: cut consolidated FY13E/14E EBITDA 15%/20%; coal remains key
We lower our consolidated EBITDA estimates by 15-20% in FY13/14 and our EPS
estimates by 33-36% driven by a reduction in standalone EBITDA estimates by
33%/38% (by Rs16/27bn). At the current aluminium price of cUS$2,200, no
captive/linkage coal, and partial bauxite sourcing from third-party sources, Mahan
is unlikely to contribute positively.
Valuation: Buy with a price target of Rs180 (earlier Rs240)
We have a new sum-of-the-parts-based price target of Rs180 for Hindalco. We
value Hindalco’s Indian business at 5x FY13E EBITDA and Novelis at 6x FY13E
EBITDA and listed subsidiaries/investments at a 20/50% discount to market price.
Key reasons why we like Hindalco
1. We are positive on aluminium prices given current spot price is very
close to the marginal CoP (US$2,150-2,200/t)—hence, we see limited
downside to earnings.
2. Secondly, Novelis is a stable earnings model—we expect EBITDA at
Novelis to increase from US$1bn to US$1.3bn between FY11-FY13
driven by volume growth and cost rationalisation.
3. We like the domestic expansion story though earnings impact will be
largely from FY14—Hindalco will see a sharp increase in earnings
given the strong pipeline of expansions—359ktpa smelter at Mahan,
1.5mt alumina refinery at Utkal, etc.
4. Although earnings from expansions will not accrue much in FY12-13,
we think Hindalco will have significant Capital Work in Progress
(CWIP) by end-FY12—US$4.3bn.
We lower our FY13E/14E earnings on capacity delays
We were earlier expecting the 359 ktpa Mahan project to be fully commissioned
by March 2012 and operate at c62%/100% capacity in FY13/14 (considering
FY13 as the ramp-up period).
Post our site visit and assessment of ground reality, we now expect the project to
be fully commissioned only by March 2013 and full volumes from Mahan to
only be reflected from FY14 onwards as H2 FY13 would be the ramp-up period.
We have not built in captive coal assumptions to our numbers.
We also defer the commissioning of the 359 ktpa Aditya smelter by six months
to October 2013.
We lower our alumina/aluminium volumes production and sales assumptions as:
1) we forecast Mahan to contribute only 150kt in FY13 and fully ramp-up
(359ktpa capacity) in FY14; and 2) we forecast the Utkal refinery to start
producing from FY14. We assume Mahan will start contributing to earnings
from FY14 given ramp-up costs will be high in FY13.
We also lower our average blended ASP forecasts for the aluminium business
(we assume slower ramp-up in downstream capacities as well). Hence, we lower
the standalone revenue estimates for FY12-14 by 3-13%, EBITDA estimates by
10-38%, and PAT estimates by 12-52%.
We raise our capex estimates for the standalone business—we now forecast
capex of US$2bn each in FY12/13, which increases the interest expenses.
Valuation
We maintain our Buy rating on Hindalco but lower our price target to Rs180
(from Rs240). This is led by:
A significant decline in earnings estimates for the standalone business from
Rs47.4bn to Rs31.6bn (in FY13)—this has led to a decline of Rs45 in the
price target. The decline in earnings in the standalone business is because we
assume no marginal contribution to earnings from Mahan in FY13. We
estimate Mahan and Utkal will start contributing to earnings from FY14.
We also lower the valuation multiple of the standalone businesses to 5x
(earlier 5.5x) on March 2013E EV/EBITDA and Novelis to 6x (earlier 6.5x)
EV/EBITDA given global headwinds in the commodity outlook.
We value investments in Aditya Birla Chemicals/Minerals at a 20% discount
to their market capitalisation, while long-term investments at a 50% discount
to their market capitalisation.
We value CWIP at 40% of FY12 estimate of US$4.3bn.
Other updates from the site visit
Renukoot Alumina Facility
Alumina CoP at Renukoot is US$270/ton
The cost breakdown:
— 30% is Bauxite (2.85t of alumina)
— 16% is Caustic soda (150kg required per tonne of alumina)
— 30% is Energy—power requirement is 330 kwh/ton of alumina
— Remaining 24% is towards wages, maintenance, depreciation, etc
The silica content of the Bauxite for the Renukoot facility is 3-3.5%, while that
in Orissa is 2.5%—lesser silica content means lesser requirement of caustic soda.
Renukoot Aluminium Complex
Hindalco's CoP at the Renukoot Aluminium complex is US$1,750/ton (as
against the current global marginal CoP of US$2200/tonne).
— 420 kg of carbon is required per tonne of aluminium (15:85 mix between
Pitch: CP Coke)—Hindalco buys Pitch/CP Coke from third-party
producers such as Himadri Chemicals, etc.
— Power requirement is 14,000 units/ton of Aluminium (15,000 units/ton
including auxiliary consumption). Power cost is Rs2.2/unit in the
Renukoot smelter, while Rs2.7/unit in the refinery.
Downstream costs
Conversion cost from molten metal to billets (billet capacity is 40kt tonne) is
Rs3,000/t (US$60/t)
— Conversion cost from molten metal to slabs is Rs6,000/t (US$120/t)
— Conversion cost from molten metal to rolled products is Rs10,000/t
(US$200/t).
Mahan’s economics
Based on the below key assumptions, Mahan’s CoP will be cUS$2,100-2,200/t,
contributing little to Hindalco’s earnings, assuming the current aluminium price
of cUS$2,200/t (this is not UBS forecast):
Mix of coal purchased from e-auction at a cost of Rs2,000/t and imported
coal
Half of the alumina requirement is sourced from Renukoot and the rest from
market purchases—blended cost of US$350/t including transportation.
Mahan CoP of Aluminium would be cUS$1,450/t if:
(1) The Mahan coal block is allotted and the 900 MW captive power plant
(CPP) generates power from the captive coal;
(2) Alumina is supplied from the Utkal refinery.
Alumina from Utkal is certain from FY14. However, the bigger variable and
higher uncertainty is with regard to the Mahan coal block allocation.
We believe that though there is some hope post the changes in the environment
ministry, approval of the Mahan coal block could be challenging. The new
minister is willing to look at the allotment of mines in forest areas on a case-bycase
basis.
Hindalco management expects a key decision to be taken on the Mahan block at
the 8 October meeting of the group of ministers (GoM) and are hopeful of a
positive outcome.
Assuming the GoM gives the consent for Mahan at its meeting, the company
will need about 1.5-2 years’ time to fully develop the mines and reach steadystate
production levels. Additionally, it looks unlikely that Hindalco will receive
tapering linkage coal from Coal India (which will be at a discounted/regulated
price of cUS$1000/t) any time soon. In any case (even assuming the Mahan coal
block is given clearance), Hindalco will have to buy coal from e-auction/import
at least until FY14.
We could witness a potential rally in the stock if the GoM announces a go-ahead
for the Mahan block, even though the full benefit of the block would only trickle
into earnings from FY14.
Hindalco Industries
Hindalco is the largest non-ferrous metal producer in India and is focused on the
production of aluminium and copper. It produces 345,000tpa of integrated
aluminium and 660,000tpa of alumina. Its downstream products include rolled,
aluminium foil, wire rods and alloy wheels. Hindalco plans to expand its copper
smelter production from 180,000 to 250,000tpa. It recently acquired two copper
mines, which could meet up to one-third of its concentrate requirements.
Hindalco's 97%-owned subsidiary Indal produces 110,000tpa of aluminium and
401,000tpa of alumina/alumina hydrate.
Statement of Risk
A sharp fall in global prices for aluminium, which in turn, is linked to the
recovery of the global economy, as well as continuing strong Chinese imports, is
the key risk factor for Indian aluminium companies
No comments:
Post a Comment