| Hindalco Industries (HNDL IN) Alcoa conf call highlights- Expects ally deficit in CY14; Strong demand outlook for downstream segment; +ve for Novelis | Overweight Price: Rs137.35 07 Apr 2014 Price Target: Rs145.00 PT End Date: 30 Dec 2014 | |
Alcoa (AA, covered by North America analyst Michael Gambardella) posted a loss in Q1, but profit excluding charges beat estimates. AA reported strong downstream earnings with Rolled Products (RP) reporting adjusted EBITDA/T of $315/T from $185/T in the Dec quarter, with record auto sheet volumes, while packaging saw pricing and volume pressure. Unlike previous quarters, AA commented substantially on the company’s downstream business investments across Autos, Packaging and Aerospace, opportunities and outlook in that segment v/s its historical focus more on the upstream business. AA also commissioned its downstream Automotive expansion.
Comments on Demand: AA commented that Aerospace and Autos demand outlook remained solid with North America Auto and Heavy truck demand expected to increase by 2-9% in North America, while Auto demand is improving in Europe. Beverage cans and packaging is expected to decline by 1-2% in North America but increase in Europe and China. AA expects global aluminum demand growth of 7% in 2014, with ex China growth of 4% and, more importantly, expects an aluminum deficit of 730KT in 2014.
Implications for Hindalco/Novelis: HNDL has rallied in sync with many of the global aluminum names as the incremental outlook for Ally improves. The recent court ruling regarding LME’s rules have also helped sentiment. We are more enthused by AA’s results in its downstream business and more importantly the bullish demand outlook. We believe the AA’s results and comments (esp. in the downstream business) are positive for Novelis, given the capacity expansion Novelis has undertaken in the segment.
Figure 1: Alcoa GRP segment vs. Novelis Adjusted EBITDA/t (US$/t)
Source: Company reports and presentation
Investment Thesis
We see improved visibility at Novelis (as capacity expansion flows through) and copper smelting earnings (as multi-year pressure on TC RC eases on higher mine supply). However, the India aluminum business continues to face challenges. The projects should aid EBITDA in FY15E but would result in higher capital costs. The key positive remains the de-leveraging we would likely see as the capex cycle comes to an end in FY14E as Novelis generates FCFs. We remain OW with a Dec-14 PT of Rs145. Our Dec-14 PT of Rs145 is based on our FY15E SOTP valuation.
Valuation
Hindalco Valuation Summary
Multiple
|
EBITDA FY15E
|
EV FY15E
| |
Aluminum India
|
5.5
|
31,654
|
174,095
|
Copper India
|
5.5
|
13,419
|
73,802
|
Novelis
|
6.5
|
64,288
|
417,869
|
ABML
|
5.5
|
1,673
|
9,199
|
Total EV
|
674,966
| ||
Net Debt
|
511,717
| ||
Adj for CWIP
|
137,250
| ||
Mcap Implied ex CWIP
|
163,249
| ||
Mcap Implied
|
300,499
| ||
No of Shares (MM)
|
2,065
| ||
Target Price (Rs)
|
145
|
Source: Company reports and J.P. Morgan estimates.
Risks to Rating and Price Target
Key risks remain a) sharp decline LME and/or premium, b) sharp decline in US subsidiary earnings, and c) Utkal project delays
Metals & Mining
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