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Depreciating rupee to cushion impact of lower commodity
prices
Aluminium prices have tumbled from its highs hit earlier in the year
(29% from peak) on worries about the strength of the global economy
and thus potential industrial demand, particularly as the European
sovereign-debt crisis continues. With LME prices near US$2,000/ton,
we see half of the industry in red (average global aluminium cost
~US$2,000/ton) and this would lead to production cuts going ahead.
We revise our aluminium prices estimates for FY12 to US$2,310/ton
and US$2,250/ton for FY13. The impact of lower commodity prices on
profitability of domestic metal producers would be cushioned by the
sharp depreciation in the rupee against the dollar (19% YTD). So while
producers in other countries have seen 10-15% fall in revenues,
domestic producers would see just a 1-3% fall.
Hindalco: Novelis to drive earnings
Hindalco has corrected sharply on account of 1) delay in capacity
expansion plan 2) rising interest costs 3) high coal costs 4) weak
commodity prices. We believe that most of the negatives are priced in.
In FY13, some rebound in demand and debottlenecking activities
would drive 4-5% volume growth for Novelis. We expect adjusted
EBIDTA/ton for Novelis to increase from US$346/ton in FY11 to
US$359/ton in FY12 and US$368/ton in FY13. On a consolidated basis,
we expect the company to witness an EBIDTA CAGR of 14.7% over
FY11-13 led by higher contribution from Novelis. Earnings from Novelis
would be resilient enough to withstand any global shocks and thereby
provide downside support to the stock price. We recommend a BUY
based on our sum-of-the-parts (SOTP) 9-month fair value of Rs185.
NALCO: Risk-reward favorable; Upgrade to BUY
NALCO’s stock price has halved over the last six months on account of
depressed Q2 FY12 results and weak commodity prices. We believe the
company has formed a bottom in terms of profitability in Q2 FY12 and
the worst is behind us. We expect margins to improve from Q2 FY12
levels on the back of improved coal supply and higher exports of
alumina. We expect OPM to improve drastically from the 9.5%
reported in Q2 FY12 to 21.1% in FY13. With no major capex over the
next two years, we estimate cash levels to increase from Rs56bn to
Rs70bn by end-FY13. Our FY13 cash levels account for 54% of the
current market cap and would lend support to the stock price. At the
CMP of Rs51, the company is trading at 5.2x FY12 EV/EBIDTA and 4x
FY13 EV/EBIDTA which is at a ~50% discount to its historic one year
forward average multiple of 10.5x. We do not see much downside from
the current levels and upgrade the stock from Market Performer to
BUY with a revised 9-month price target of Rs60.
Depreciating rupee to cushion the impact of lower commodity
prices
Aluminium prices have tumbled from its highs hit earlier in the year
(29% from peak) on worries about the strength of the global economy
and thus potential industrial demand, particularly as the European
sovereign-debt crisis continues. Aluminium prices have corrected
sharply to sub-US$2,000/ton from a high of US$2,800/ton hit during
the first quarter of 2011. Structural issues like over-capacity and high
inventory levels continue to remain an overhang on aluminium prices.
Low economic incentives to purchase aluminium led to subdued
aluminium imports from ex-China, as consumers were focussed on
destocking. In addition to this, the gradual increases of aluminium
production, which hit a record 45mt annualised in August, dampened
sentiments.
However, the fall in aluminium has been lower than other base metals
during the year. The strong rise in input costs has largely contributed
to the metal’s outperformance in 2011. The decline in costs of raw
material used in aluminium manufacturing has been much lower than
the decline in aluminium prices. Input costs have continued to rise in
2011, led by shortages in bauxite, alumina and coal, especially in
China where 45% of smelting capacity is in the top quartile of the
global cost curve and 20% use outdated technology. We estimate
average global aluminium costs at US$2,000/ton. With LME prices near
US$2,000/ton, we see half of the industry in red and this would lead to
production cuts going ahead.
We believe closures do not take place overnight or even within a few
weeks of a price tumble. Since it is expensive to close down plants,
producers do not want to take such steps until they are sure weak
prices will persist for a long time. It costs a lot of money to put plants
on care and maintenance. Ultimately, cuts in production should help
the market find a bottom since this means less supply. We expect
prices would find a floor if prices stay lower for a longer period and
producers would find it difficult to sustain. With marginal cost being
above current prices and demand remaining steady, we expect
aluminium prices to rise in FY13 from the current level. We revise our
aluminium prices estimates for FY12 to US$2,310/ton and
US$2,250/ton for FY13.
The impact of lower commodity prices on profitability of domestic
metal producers would be cushioned by the sharp depreciation in the
rupee against the dollar (19% YTD). Indian metal producers will be at
an advantage, in our view, given that most of the other major
currencies have remained largely flat, while the rupee has depreciated
by ~16% during the past three months. So while producers in other
countries have seen 10-15% falls in revenues, domestic producers
would see just a 1-3% fall. On account of the sharp decline in the
rupee against the dollar, we revise our rupee estimate to 48 in FY12
and 50 in FY13.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Depreciating rupee to cushion impact of lower commodity
prices
Aluminium prices have tumbled from its highs hit earlier in the year
(29% from peak) on worries about the strength of the global economy
and thus potential industrial demand, particularly as the European
sovereign-debt crisis continues. With LME prices near US$2,000/ton,
we see half of the industry in red (average global aluminium cost
~US$2,000/ton) and this would lead to production cuts going ahead.
We revise our aluminium prices estimates for FY12 to US$2,310/ton
and US$2,250/ton for FY13. The impact of lower commodity prices on
profitability of domestic metal producers would be cushioned by the
sharp depreciation in the rupee against the dollar (19% YTD). So while
producers in other countries have seen 10-15% fall in revenues,
domestic producers would see just a 1-3% fall.
Hindalco: Novelis to drive earnings
Hindalco has corrected sharply on account of 1) delay in capacity
expansion plan 2) rising interest costs 3) high coal costs 4) weak
commodity prices. We believe that most of the negatives are priced in.
In FY13, some rebound in demand and debottlenecking activities
would drive 4-5% volume growth for Novelis. We expect adjusted
EBIDTA/ton for Novelis to increase from US$346/ton in FY11 to
US$359/ton in FY12 and US$368/ton in FY13. On a consolidated basis,
we expect the company to witness an EBIDTA CAGR of 14.7% over
FY11-13 led by higher contribution from Novelis. Earnings from Novelis
would be resilient enough to withstand any global shocks and thereby
provide downside support to the stock price. We recommend a BUY
based on our sum-of-the-parts (SOTP) 9-month fair value of Rs185.
NALCO: Risk-reward favorable; Upgrade to BUY
NALCO’s stock price has halved over the last six months on account of
depressed Q2 FY12 results and weak commodity prices. We believe the
company has formed a bottom in terms of profitability in Q2 FY12 and
the worst is behind us. We expect margins to improve from Q2 FY12
levels on the back of improved coal supply and higher exports of
alumina. We expect OPM to improve drastically from the 9.5%
reported in Q2 FY12 to 21.1% in FY13. With no major capex over the
next two years, we estimate cash levels to increase from Rs56bn to
Rs70bn by end-FY13. Our FY13 cash levels account for 54% of the
current market cap and would lend support to the stock price. At the
CMP of Rs51, the company is trading at 5.2x FY12 EV/EBIDTA and 4x
FY13 EV/EBIDTA which is at a ~50% discount to its historic one year
forward average multiple of 10.5x. We do not see much downside from
the current levels and upgrade the stock from Market Performer to
BUY with a revised 9-month price target of Rs60.
Depreciating rupee to cushion the impact of lower commodity
prices
Aluminium prices have tumbled from its highs hit earlier in the year
(29% from peak) on worries about the strength of the global economy
and thus potential industrial demand, particularly as the European
sovereign-debt crisis continues. Aluminium prices have corrected
sharply to sub-US$2,000/ton from a high of US$2,800/ton hit during
the first quarter of 2011. Structural issues like over-capacity and high
inventory levels continue to remain an overhang on aluminium prices.
Low economic incentives to purchase aluminium led to subdued
aluminium imports from ex-China, as consumers were focussed on
destocking. In addition to this, the gradual increases of aluminium
production, which hit a record 45mt annualised in August, dampened
sentiments.
However, the fall in aluminium has been lower than other base metals
during the year. The strong rise in input costs has largely contributed
to the metal’s outperformance in 2011. The decline in costs of raw
material used in aluminium manufacturing has been much lower than
the decline in aluminium prices. Input costs have continued to rise in
2011, led by shortages in bauxite, alumina and coal, especially in
China where 45% of smelting capacity is in the top quartile of the
global cost curve and 20% use outdated technology. We estimate
average global aluminium costs at US$2,000/ton. With LME prices near
US$2,000/ton, we see half of the industry in red and this would lead to
production cuts going ahead.
We believe closures do not take place overnight or even within a few
weeks of a price tumble. Since it is expensive to close down plants,
producers do not want to take such steps until they are sure weak
prices will persist for a long time. It costs a lot of money to put plants
on care and maintenance. Ultimately, cuts in production should help
the market find a bottom since this means less supply. We expect
prices would find a floor if prices stay lower for a longer period and
producers would find it difficult to sustain. With marginal cost being
above current prices and demand remaining steady, we expect
aluminium prices to rise in FY13 from the current level. We revise our
aluminium prices estimates for FY12 to US$2,310/ton and
US$2,250/ton for FY13.
The impact of lower commodity prices on profitability of domestic
metal producers would be cushioned by the sharp depreciation in the
rupee against the dollar (19% YTD). Indian metal producers will be at
an advantage, in our view, given that most of the other major
currencies have remained largely flat, while the rupee has depreciated
by ~16% during the past three months. So while producers in other
countries have seen 10-15% falls in revenues, domestic producers
would see just a 1-3% fall. On account of the sharp decline in the
rupee against the dollar, we revise our rupee estimate to 48 in FY12
and 50 in FY13.
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