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India Equity Research Reports, IPO and Stock News
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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily27032012.pdf
Hindalco Industries: Correction not enough to turn constructive
` Mahan: A thorn in the flesh
` Coal price increase impacts extant operations
` Leverage may be aggressive and require equity infusion to correct
Correction not enough to turn constructive. Hindalco’s stock corrected 10.5% over
the past month and trades at 6.3X FY2013E EBITDA. Despite the correction, we retain
our REDUCE rating, noting (1) increasing challenges in securing coal blocks for its
Mahan smelter, (2) the direction towards market pricing for coal supplies to non-utilities
leading to higher costs for extant operations and (3) a leveraged balance sheet that
increases business risk profile. We moderate volume assumptions and cut FY2013-14E
EPS estimates by 0.7% and 1% respectively. Cut target price to Rs135 (from Rs160).
Mahan: A thorn in the flesh
The economics of the Mahan aluminium smelter is questionable. Even with a captive coal block,
Hindalco would require an aluminium price of US$2,600/tonne to earn RoIC of 10%, value
destructive in our view. Without a captive coal block, the cost of production with bought out
alumina and e-auction/imported coal (domestic coal is scarce and imports are expensive with the
nearest port being 900 km away) will be higher than current aluminium prices. Government policy
is inclined towards coal block auctions for non-power sector users. Given the uncertainty around
this critical issue, we do not ascribe value to the Mahan smelter in our SOTP-based target price.
Coal price increase impacts extant operations
Hindalco relies on linkage coal to power Renukoot’s smelting operations. Renukoot’s annual
aluminium production capacity is 345 kt, 68% of current production capacity. Cost of production
of US$1,850/tonne at Renukoot is already in the third quartile of the global cost curve. Coal India
has increased notified prices over the past two years and appears to be moving towards market
pricing of coal, even for non-power users. This has impacted profitability of extant operations and
will continue to do so in future.
Leverage may be aggressive and require equity infusion to correct
Hindalco has an aggressive capex plan of US$4.5 bn, slated for fruition over the next three years.
The plans, when envisaged, were commendable, but roadblocks (policy and execution) make the
funding structure aggressive. Mahan and Utkal were funded with debt: equity ratio of 3:1. Overall
net debt/EBITDA ratio of 3.4X FY2013E and 3X FY2014E financials may appear to be manageable
against a backdrop of steady EBITDA generation from Novelis and the India business. However this
hypothesis will be tested in the light of continued delays in project execution, policy inaction and
concerns about profitability of key projects (policy and market induced). We believe the company
will have to make an equity infusion to reduce balance sheet stress. Warrants issued to promoters
is small and good step. More such steps will be needed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily27032012.pdf
Hindalco Industries: Correction not enough to turn constructive
` Mahan: A thorn in the flesh
` Coal price increase impacts extant operations
` Leverage may be aggressive and require equity infusion to correct
Correction not enough to turn constructive. Hindalco’s stock corrected 10.5% over
the past month and trades at 6.3X FY2013E EBITDA. Despite the correction, we retain
our REDUCE rating, noting (1) increasing challenges in securing coal blocks for its
Mahan smelter, (2) the direction towards market pricing for coal supplies to non-utilities
leading to higher costs for extant operations and (3) a leveraged balance sheet that
increases business risk profile. We moderate volume assumptions and cut FY2013-14E
EPS estimates by 0.7% and 1% respectively. Cut target price to Rs135 (from Rs160).
Mahan: A thorn in the flesh
The economics of the Mahan aluminium smelter is questionable. Even with a captive coal block,
Hindalco would require an aluminium price of US$2,600/tonne to earn RoIC of 10%, value
destructive in our view. Without a captive coal block, the cost of production with bought out
alumina and e-auction/imported coal (domestic coal is scarce and imports are expensive with the
nearest port being 900 km away) will be higher than current aluminium prices. Government policy
is inclined towards coal block auctions for non-power sector users. Given the uncertainty around
this critical issue, we do not ascribe value to the Mahan smelter in our SOTP-based target price.
Coal price increase impacts extant operations
Hindalco relies on linkage coal to power Renukoot’s smelting operations. Renukoot’s annual
aluminium production capacity is 345 kt, 68% of current production capacity. Cost of production
of US$1,850/tonne at Renukoot is already in the third quartile of the global cost curve. Coal India
has increased notified prices over the past two years and appears to be moving towards market
pricing of coal, even for non-power users. This has impacted profitability of extant operations and
will continue to do so in future.
Leverage may be aggressive and require equity infusion to correct
Hindalco has an aggressive capex plan of US$4.5 bn, slated for fruition over the next three years.
The plans, when envisaged, were commendable, but roadblocks (policy and execution) make the
funding structure aggressive. Mahan and Utkal were funded with debt: equity ratio of 3:1. Overall
net debt/EBITDA ratio of 3.4X FY2013E and 3X FY2014E financials may appear to be manageable
against a backdrop of steady EBITDA generation from Novelis and the India business. However this
hypothesis will be tested in the light of continued delays in project execution, policy inaction and
concerns about profitability of key projects (policy and market induced). We believe the company
will have to make an equity infusion to reduce balance sheet stress. Warrants issued to promoters
is small and good step. More such steps will be needed.
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