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Stable cashflows, project commissioning to boost outlook
We have a Dec12 TP of INR152 for HNDL, which represents a potential
upside of 30% and includes a 20% discount to (Apr06‐Dec11) historical
average EV/EBITDA and P/E multiple. This target may have additional
upside of 37%, if the uncertainty in earnings ‐ due to weak aluminium
prices and a delay in expansion of greenfield projects ‐ recedes. In the
worst‐case scenario, we estimate a delay in commissioning of
brownfield projects and aluminium prices of USD2,000/tonne for
FY13f‐FY14f. Based on this, we arrive at a worst‐case fair value of
INR105/share. Considering the favourable risk reward‐ratio, we
upgrade our rating to Buy.
Target likely to rise by 37%, if uncertainty on projects, prices declines
We have a Dec12 target of INR152, which represents a potential upside of 30%
and includes our 20% discount to the average historical multiple to account for
the uncertainty in earnings due to weak aluminium prices, global demand and
delay in expansion of greenfield projects. Our TP has the potential to be raised
by 37%, if valuation multiples revert to their mean due to improvement in the
global demand environment and price outlook.
Weak aluminium prices, earnings downgrade led to underperformance
HNDL underperformed the Sensex by 29% during the past year. This was due to
c25% decline in aluminium prices since Jun11, which has been partially offset
by the 17% depreciation in the INR. Lower‐than‐estimated realizations and an
increase in coal cost by Coal India (COAL IN, NR) led to downgrade in earnings.
This is unlikely to extend as the global cost curve restricts further downsides, as
25% of global producers incur losses at current LME price of USD2,000/tonne.
Fair value in worst‐case scenario likely to be INR105/share
In the worst‐case scenario, volume growth in the aluminium business for FY13f is
likely to remain flat, if there is a delay in the commissioning of the 52,000 tonne
brownfield expansion at Hirakud. We forecast average aluminium price of
USD2,000/tonne for FY13‐FY14 against our earlier estimate of USD2,250/tonne.
Our revised EPS estimate for FY13f and FY14f is likely to be INR10.7 and INR11.6,
respectively. Applying a 20% discount to the historical average multiple, our
worst case fair value is likely to be INR105/share.
Clearance to greenfield project likely to be a catalyst for growth
On‐schedule commissioning of greenfield projects, obtaining clearance for coal
mining at Mahan and reduced demand and price uncertainty in global markets
are likely to provide clarity on projects and reduce costs.
Upgrade rating to Buy; Dec12 target of INR152
We discount the historical average (Apr06‐Dec11) EV/EBITDA of 6.8x and P/E of
12.4x by 20% to account for weak aluminium demand, low prices in the global
market and uncertainty on greenfield projects. Roll over target to Dec12. Our
TP of INR152 is the average of the fair values based on these multiples. We
upgrade our rating to Buy, considering the favourable risk‐reward ratio and the
past underperformance. Risk factors include weak aluminium prices and delay
in project commissioning.
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