Initiating Coverage
Hindalco Industries
Buy
Target Price: Rs122
CMP: Rs96
Upside: 27.1%
Worst is behind and priced in
We expect the worst to be over for Hindalco with the commissioning of Mahan and Utkal projects in H1FY14 expected to ease cash flows, release long standing CWIP and deleverage the stretched balance sheet. We see volume growth ahead in domestic aluminium business and successful implementation of raw material projects (bauxite and coal) for new capacities alleviating market concerns on returns and margins. Novelis is expected to continue providing solid earnings support with relentless focus on increasing recycling volumes, expansion in growth segments and process & cost improvements. We expect consolidated EBITDA CAGR of 12.8% during FY13-15E on the back of volume growth and better LME aluminium realization (which we believe is near its bottom from a medium term view). We initiate coverage with a BUY rating and a target price of Rs122.
m Projects commissioning to kick-start volume growth: After facing recurring delays, we expect Utkal and Mahan projects to be commissioned in H1FY14 and result in sales volume CAGR of 10%/40% in aluminium/alumina for Hindalco during FY12-15E. We expect volume contribution of 70/160ktpa from the Mahan smelter and alumina contribution of 350/800ktpa from Utkal for FY14E/15E.
m Concerns on margins and returns for new projects overdone in the long run: We see market concerns on margins and returns from new projects (due to cost overruns, integration concerns and low LME) largely overdone. We expect margins and returns from new projects to remain poor initially (during the next 12-15 months till stabilisation and integration of raw materials) but improve substantially with captive bauxite for Utkal and captive coal for Mahan smelter CPP. We expect 11%+ ROE from Utkal and Mahan projects once captive bauxite and coal starts flowing.
m Existing aluminium operations to benefit from Hirakud FRP expansion: The FRP plant of 135ktpa from Novelis’ UK facility has been shifted to Hirakud. This plant, capable of producing can body stock, is expected to provide an additional US$300-350/tonne after stabilization and with VAP capacity share at Hirakud increasing to ~65%, we see this plant providing significant support to aluminium business margins in the long run.
m Novelis on expansion drive with focus on growing segments and markets: We expect Novelis to deliver stable EBITDA performance going forward with slow and steady volume growth backed by expansion in premium products targeted at growth markets and segments (Brazil, Asia and the Automotive segment). We see EBITDA/tonne improving to US$350 with volumes of 3185kt resulting in EBITDA of US$1.06bn in FY15E. Novelis is currently expanding its capacity from 3 mtpa to 4.1 mtpa at a capex of ~US$1.5bn with a focus on increasing recycling products from 39% to 50% by FY16E.
m Global aluminium prices look bottomed out; cost curve support and demand improvement key triggers: We expect that LME aluminium prices have bottomed out (at current ~US$1950 levels) and see that ~30%+ capacity globally is not profitable at current levels. Demand improvement through infrastructure spending in developing countries, improving PMIs in the developed world, increased use in transport and electrical segments and global cost curve support could take LME prices upwards in our view. We factor in US$2150/2200 of average LME aluminium price for FY14E/15E.
m Valuations compelling, initiate with a Buy: Hindalco currently trades at a discount to global peers and is also near its all time low on BV basis (0.5x FY15E). We value the company on SOTP basis using EV/EBITDA methodology on FY15E earnings and arrive at a fair value of Rs122. Initiate with a Buy.
m Key Risks: Lower LME prices, further delay in projects, adverse rupee.
m Concerns on margins and returns for new projects overdone in the long run: We see market concerns on margins and returns from new projects (due to cost overruns, integration concerns and low LME) largely overdone. We expect margins and returns from new projects to remain poor initially (during the next 12-15 months till stabilisation and integration of raw materials) but improve substantially with captive bauxite for Utkal and captive coal for Mahan smelter CPP. We expect 11%+ ROE from Utkal and Mahan projects once captive bauxite and coal starts flowing.
m Existing aluminium operations to benefit from Hirakud FRP expansion: The FRP plant of 135ktpa from Novelis’ UK facility has been shifted to Hirakud. This plant, capable of producing can body stock, is expected to provide an additional US$300-350/tonne after stabilization and with VAP capacity share at Hirakud increasing to ~65%, we see this plant providing significant support to aluminium business margins in the long run.
m Novelis on expansion drive with focus on growing segments and markets: We expect Novelis to deliver stable EBITDA performance going forward with slow and steady volume growth backed by expansion in premium products targeted at growth markets and segments (Brazil, Asia and the Automotive segment). We see EBITDA/tonne improving to US$350 with volumes of 3185kt resulting in EBITDA of US$1.06bn in FY15E. Novelis is currently expanding its capacity from 3 mtpa to 4.1 mtpa at a capex of ~US$1.5bn with a focus on increasing recycling products from 39% to 50% by FY16E.
m Global aluminium prices look bottomed out; cost curve support and demand improvement key triggers: We expect that LME aluminium prices have bottomed out (at current ~US$1950 levels) and see that ~30%+ capacity globally is not profitable at current levels. Demand improvement through infrastructure spending in developing countries, improving PMIs in the developed world, increased use in transport and electrical segments and global cost curve support could take LME prices upwards in our view. We factor in US$2150/2200 of average LME aluminium price for FY14E/15E.
m Valuations compelling, initiate with a Buy: Hindalco currently trades at a discount to global peers and is also near its all time low on BV basis (0.5x FY15E). We value the company on SOTP basis using EV/EBITDA methodology on FY15E earnings and arrive at a fair value of Rs122. Initiate with a Buy.
m Key Risks: Lower LME prices, further delay in projects, adverse rupee.
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