Novelis holds the key

December 16, 2011

Novelis to remain the key growth driver with an EBITDA of

Reco Accumulate CMP Rs 126

EPS change FY12E/13E (%) Target Price change (%) Nifty Sensex

more than US$1 bn, largely immune to LME. Successful debt refinancing to address concerns on cons. balance sheet

Target Price Rs 154

NA NA 4,652 15,491

First quartile unit cost of production of domestic aluminium

business to ensure profitability even at tough times. Threefold rise in aluminium capacities to aid volume growth

Higher share of value added products in aluminium segment

(~50%) and strong by-product contribution in copper business would help mitigating commodity risk to a large extent

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

Stability in Novelis with capex driven growth and attractive

3M (5) 6M (15) 12M (44) (28) (13) (26)

1M 2 10

valuations should outplay short- term concerns; Initiate coverage with target price of Rs 154; Accumulate

Novelis to continue surprise positively with stable EBITDA

Post its turnaround, Novelis has been surprising positively with its strong operational performance. During H1FY12, its adjusted EBITDA stood at US$607 mn, in line with the FY12E guidance of US$1.1-1-15 bn. Adj. EBITDA/ tonne touched a high of US$418 during Q2FY12. We believe Novelis would continue to deliver strong performance as it is largely immune to the LME volatility, being cost efficient and having pricing power.

Relative Price Chart

275 Rs % 20 240 8

205

-4

170

-16

Low cost operations, an asset; enhanced capacity, future trigger

Hindalcos aluminium cost of production (~US$1,650/ tonne) remains in the first quartile of the global cost curve due to captive power and alumina backed by own coal and bauxite mines respectively. Efficient technology, part sourcing of concentrate from captive mines and significant by-product contributions make its copper business cost competitive. Hindalco plans a threefold increase in its aluminium and alumina capacities to 1.64 mtpa and 4.5 mtpa respectively in a phased manner by FY16, through both greenfield and brownfield expansions. The cumulative capex for these projects is pegged at ~Rs500 bn. Though, there have been some delays in all the projects due to various externalities, we believe FY13 would see some comfort as far as the commissioning of Mahan smelter and Utkal refineries is concerned.

135

-28

100 Dec-10

Feb-11

Apr-11
Hindalco (LHS)

Jun-11

Aug-11

Oct-11

-40 Dec-11

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

Metals & Mining HNDL@IN 1915 1 1915 252/113 240/4,545 10449755 25.7

Focus on value added products to help mitigate volatility

Value added products constitute about half of Hindalcos aluminium operations in India. In alumina, the focus remains on special grade (contributed 60% of the total alumina sales during Q1FY12). In copper segment too, the company has value added products meeting international standards. We believe this will continue to help the company offset volatility in LME to a large extent. Long term engagement at higher copper TcRc (Treatment and Refining charges) during early FY12 serves as a safeguard against the recent global pressure on TcRc contracts.

Shareholding Pattern (%)

Sep-11 Promoters FII/NRI Institutions Private Corp Public
Source: Capitaline

Jun-11 32.1 42.4 12.8 4.9 7.8

Mar-11 32.1 42.4 13.0 4.9 7.7

32.1 39.4 14.1 6.3 8.2

Project execution concerns priced in; valuations comfortable

At CMP of Rs 126, the stock trades at 7.8x and 5.4x FY13 EPS and EV/EBITDA respectively. We believe delay in domestic projects is already priced in. However, Novelis is likely to continue delivering excellent performance. Factoring these along with volatility in aluminium prices and copper TcRc, we have valued Hindalco on SOTP basis and arrived at a fair value of Rs 154/ share, providing an upside of 22%. We initiate our coverage on Hindalco with a ACCUMULATE recommendation. Financial Snapshot
YENet Sales 607,221 720,779 779,536 808,267 EBITDA (Core) 97,458 80,017 83,325 93,322 (%) 16.0 11.1 10.7 11.5 APAT 39,276 24,564 29,470 32,091 EPS (Rs) 22.2 12.8 15.4 16.8 EPS % chg 590.7 -42.1 19.9 16.5 RoE (%) 18.2 8.5 9.3 9.3 P/E 7.3 16.5 8.7 7.8 EV/ EBITDA 4.0 6.9 5.8 5.4 P/BV 1.3 1.4 0.8 0.7 Mar FY10 FY11 FY12E FY13E

Jagdish Agarwal jagdish.agarwal@emkayglobal.com +91 22 6612 1381 Goutam Chakraborty goutam.chakraborty@emkayglobal.com +91 22 6612 1275 Prince Poddar prince.poddar@emkayglobal.com +91 22 6612 1238

Rs Mn

Emkay Global Financial Services Ltd

Initiating Coverage

Hindalco Industries

Hindalco Industries

Initiating Coverage

Investment Rationale
Indias leading aluminium producer
Hindalco is a leading producer of aluminium in India with an existing capacity of 506 ktpa of primary aluminium. Its aluminium operations are largely integrated with bauxite mining, alumina refining, primary aluminium, value added products (rolled products, extrusions, foils and specialty alumina) and power generation. The acquisition of Novelis has provided the company a presence in the global high technology rolled product market. Hindalco, along with Novelis, is the largest aluminium producer in rolled products category in Europe and South America, while it ranks second in North America and Asia. Through Novelis, Hindalco is also the largest producer of rolled beverage cans and aluminium automotive sheets in the world. While primary aluminium sales are expected to grow
700 600 500 400 300 200 100 0 2007 Ingots 2008 2009 2010 2011 2012E 2013E Foils Rolled Extruded Redraw Rods 25 69 38 170 138 28 72 43 180 151 239 223 210 22 75 36 149 17 92 39 184 18 94 35 177 18 85 34 191 316 195

(kt)
18 90 36

residual alumina sales are thus expected to decline

400 350 300 250 200 150 100 50 0

(kt)

191

300

260

310 238 241

339 170

2007

2008

2009

2010 Alumina

2011

2012E

2013E

Source: Company, Emkay Research

Source: Company, Emkay Research

It is also a leading copper producer

Hindalcos copper operation comprises of producing copper through smelting, converting to copper cathode and continuous copper rods. The copper smelting facilities with a combined capacity of 500 ktpa located at Dahej, is one of the largest single location smelting facilities in the world. Hindalcos copper smelting is also equipped to produce gold, silver, phosphatic fertilizers and sulphuric acids as by- products. The domestic copper operation is also supported by assured supply of concentrates (~20% of the total requirement) from its two Australian copper mines viz. Nifty and Mount Gordon. Copper production volumes to remain flat
500 400 300 294 200 100 109 0 2007 2008 2009 2010 2011 2012E 2013E CC Rods
Source: Company, Emkay Research

(kt)

Volumes at Nifty and Mount Gordon to increase

62,000 1,627 1,800

(tonnes)
2,000

328

301

333

336

320

335

58,000

643 60,000 58,034 58,600

140

146

147

145

138

142

56,450 54,000 2010 2011 Nifty

Source: Company, Emkay Research

2012E Mount Gordon

2013E

Copper Cathodes

Emkay Research

16 December 2011

Hindalco Industries Table: Hindalcos standalone capacities in India

(Capacity in tpa) Aluminium Operations Alumina Primary Aluminium Conductor redraw rods Extrusion Rolling plant Foils Specialty products Copper Operations Copper smelter CC Rods Sulphuric acid Phosphoric acid DAP and complexes Gold Silver Power Operations Power (MW)
Source: Company, Emkay Research

Initiating Coverage

Dahej Renukoot

Muri Belgaum Hirakud Alupuram

Belur

Taloja Mauda Kalwa Kollur Silvassa Renusagar

Total 1,500,000

700,000 450,000 345,000 56,400 23,000 80,000

350,000 161,400 8,000 45,000 50,000 138,000 30,000 6,000 4,000 30,000

506,400 56,400 31,000 205,000 40,000 138,000 500,000 142,000 1,670,000 180,000 400,000 15 150

500,000 142,000 1,670,000 180,000 400,000 15 150 367 742

1,109

Low cost of production due to strong backward integration

The average global cost of aluminium production has been on the rise with it touching th US$2,050/ tonne in mid- 2011. The 90 percentile cost remains at US$2,450/ tonne, indicating ~21% rise in less than one year period. This has been due to commodity price inflation across all categories viz. energy, coal and alumina. Global cost curve is on the rise
2500 2000 1500 1000 500 0 2001 Average
Source: Company, Emkay Research, Industry Reports

(US$/tonne)
2,450 2,031 1,693 1,650 2,050

1,288 1,018

1,328

2005

2010 90th Percentile

Mid-2011

Hindalco has been one of the low cost producers of aluminium globally. The average cost of aluminium production for Hindalco currently has been ~US$1,650/ tonne and remains in the first quartile of the global cost curve. The key reason for lower costs has been its own power generation through captive coal mine and alumina through own bauxite mine. Hindalco was also allotted another coal mine under Mahan project along with Essar Power which is under review by MoEF (Ministry of Environment and Forest). Together with Mahan, Hindalcos total coal reserve stands at 233 mt. On the other hand, its bauxite reserves are 443 mt. Both of these would be sufficient to meet Hindalcos requirement at enhanced capacity for the next 25 years. With full backward integration, Hindalcos Hirakud smelter has the lowest cost of production in the aluminium segment. While Renukoot smelter has support from captive alumina, coal sourcing through linkages and e-auction from Coal India slightly elevates the operational costs.

Emkay Research

16 December 2011

Hindalco Industries

Initiating Coverage

In case of copper business, concentrate requirements are largely sourced through long term contracts and partially from own operational mines in Australia. The company has invested largely in superior technology smelters at Dahej. Along with that, use of captive power and operation of own all-season jetty with handling capacity of 4,500 ktpa near Dahej, helps the company scale down operational costs significantly compared to its peers. With backward and forward integrations, we expect Hindalcos Indian operations to continue to have low costs and be favorably positioned in the global cost curve.

Three fold capacity expansion plan to trigger future growth

Hindalco has embarked on a massive capacity expansion drive, with plans to increase its capacity 3x to 1.64 mtpa through three greenfield projects viz. Mahan, Aditya and Jharkhand. All the three projects consist of similar capacities i.e. 359 ktpa smelter with 900 MW captive power. The Mahan project is coming up in Bargwan, MP while the Aditya project would be in Orissa. From existing combined capacity of 1.5 mtpa, alumina refining capacity is being raised to 4.5 mtpa with additional 1.5 mtpa each in Utkal and Aditya projects. The cumulative total capex for these projects is pegged at ~Rs 500 bn. Table: Expansion projects for Hindalco
Project Name Hirakud Mahan Utkal Aditya Aditya Jharkhand Project Type Brownfield Greenfield Greenfield Greenfield Greenfield Greenfield Product Aluminium Aluminium Alumina Aluminium Alumina Aluminium New Capacity (ktpa) 51.6 359.0 1,500.0 359.0 1,500.0 359.0 Total Cost (Rs bn) 105.0 72.0 105.0 60.0 105.0 Debt (Rs bn) 77.8 49.1 NA NA NA Drawdown (Rs bn) 60.0 40.0 NA NA NA Expected Completion Q4FY12 Q4FY12 Q4FY13 Q1FY14 CY2014 CY2015

Source: Company, Emkay Research

Threefold increase in primary aluminium capacity (ktpa)

1,800 1,500 1,200 900 600 300 0 Present Hirakud Mahan Aditya Jharkhand Total 506 52 359 1,635 359 359

and also in Alumina

4,500 1,500 3,000 1,500 1,500 1,500 0 Present Utkal Aditya

(ktpa)

4,500

Total

Source: Company, Emkay Research

Source: Company, Emkay Research

In case of brownfield projects, smelting capacity expansion in Hirakud has been progressing well and the company has already increased its capacity to 161 ktpa in Q4FY11. Further expansion to 213 ktpa along with a CPP of 100 MW is scheduled to be commissioned during end FY12. Next phase of expansion to 360 ktpa with additional CPP of 500 MW is under evaluation. The company is also in the process of transferring key equipments from FRP plant of Novelis in Rogerstone, UK to Hirakud at an estimated cost of ~Rs 8 bn. This would enable the company cater to the local and regional exports demand of superior engineering products, including can body stock. The company has also been evaluating expansion of its Belgaum special aluminium plant capacity from 189 ktpa to 301 ktpa.

Emkay Research

16 December 2011

Hindalco Industries

Initiating Coverage

Power capacity expansion plan (MW)

4,500 3,600 2,700 1,800 900 0 249 1,019 Present 100 900 90 3,819 900 90 900 429

Jharkhand Al

Hirakud Al

Utkal Alumina

Mahan Al

Pow er Cap (MW)

Cogen Cap (MW)

Pow er Cap. Add (MW)

Aditya Al

Aditya Alumina

Cogen Cap. Add (MW)

Source: Company, Emkay Research

Though, there have been some delays in all the projects due to various externalities, we believe FY13 would see some comfort in terms of commissioning of Mahan and Utkal projects. We have assumed 90 kt of incremental production from Mahan in FY13. Further delay however, would be a deterrent due to significant cost overrun and lower volume. Mahan smelter ramp-up plan
400 350 300 250 200 150 100 50 0 40 Dec '11 - Apr '12 Apr '12 - Jul '12 Sep '12 - Dec '12 Dec '12 - Jan '13 Jan '13 140 140 40 360

(No. of pots)

Starting with addition of 40 pots in December 2011, Hindalco plans to ramp-up its Mahan smelter to 360 pots by January 2013.

High margin value added products to help mitigate LME volatility risk
Hindalco has been constantly focusing on the value added products in its aluminium business. Value-added products in the form of rolled products, extrusions, redraw rods and foils, on an average, constitute about half of Hindalcos aluminium sales volume. High share of value-added products by volume in Al sales
Foils 5% Extruded Products 11% Primary Aluminium 39% Value added Products 61% Rolled Products 55% Redraw Rods 29%

is expected to fall by 2013 on lack of capacity additions

Foils 5% Extruded Products 11% Primary Aluminium 47% Value added Products 53% Rolled Products 57% Redraw Rods 27%

Source: Company, Emkay Research

Rolled products which contribute more than 50% of the total volume of value-added products, attract a premium of ~US$700/tonne

Emkay Research

16 December 2011

Total

Hindalco Industries Premiums on value-added products to remain stable

3000 2500 2000 1500 1000 500 0 2007 Rolled 766 543 169 985 640 166 2008 2665 1975 2597 2318 2257 1046 737 137 2011 2350 2275 1050 700 135 2012E Foils

Initiating Coverage

2625 2395

2481 2238 1093 808 120 2009 Extruded

2350 2250 1050 700 135 2013E

3000 2500 2000 1500 1000

1871 1062 689 178 2010

Redraw Rods

LME (RHS)

Even with volatile LMEs, the premiums on value-added products to remain stable, largely protecting margins

The premiums Hindalco enjoys on various products are largely stable and does not necessarily depend on aluminium LME, as most of its aluminium operations are into valueadded segment. The same is evident from the chart above, which indicates that even during sharp volatility in LME, the company has been able to maintain premiums in different product segments. While LME may have impact on the topline of the company, the bottomline remains largely protected. In alumina also, the focus remains on special grade, which contributed 60% to the total alumina sales in Q1FY12. Like-wise, specials constitute a significant portion of total alumina sales
100 80 60 40 20 19.0 0 Q1FY11 Q2FY11 Standard
Source: Company, Emkay Research

(kt)

34.2 36.0 49.8

43.8

35.0 37.0

44.1

47.1 22.0

Q3FY11 Specials

Q4FY11

Q1FY12

In copper segment, the company has been into value added products with internationally acceptable standards. As a custom smelter, Hindalco earns low but steady margins in terms of TcRc. By-product sales from copper business constitute 13% of the segmental revenue from copper. Hindalcos copper by-product portfolio comprises of gold, silver, phosphatic fertilizer and sulphuric acid. By-products of copper constitute a relatively lower proportion of sales (by value)

Copper Cathode 50% Others 13% CC Rods 37%

DAP & Complexes 30% Gold 56% Sulphuric Acid 10% Silver 4%

Source: Company, Emkay Research

Emkay Research

16 December 2011

Hindalco Industries

Initiating Coverage

Strong value added product portfolio in aluminium segment and stable contribution from copper by- products to help mitigate LME volatility to a large extent

We believe, in aluminium, fair exposure to value added products will continue to help the company offset LME volatility risk to a large extent, as these charge handsome premium over the LME and cater to customized demand category. On the other hand, in custom copper smelting business, LME prices are only a pass-through. TcRc and contribution from by-product sales drive segmental margins. Spot TcRc has significantly corrected during H1FY12. However, Hindalcos low cost operations and contributions from by-product sales would enable the copper business to contribute even at low market TcRcs. Further, Hindalco usually has long term contracts, serving large part of its business needs.

Novelis: the stepping stone to global leadership

Novelis, earlier a part of Alcan Incs rolling division, was spun off and incorporated as a separate entity in January 2005. Through acquisition of Novelis in May 2007, Hindalco became the worlds leading aluminium rolled product producer based on shipment of volume. It is now the largest producer in Europe and South America and second largest producer in North America and Asia. Novelis has a market share of ~20% in the global flatrolled aluminium product market, with global leadership in used beverage can recycling. It recycles ~40 bn beverage cans per annum. Novelis operates in 11 countries in the abovementioned 4 continents through 31 plants. Beverage cans form a major chunk of Novelis end use product shipments (2010)
Others 14% Beverage Cans 54%

Transportation 7%

Industrial 10%

Foil and packaging 15%

Source: Company, Emkay Research

Novelis turned around, to deliver stable EBITDA performance

Hindalco had to go though a tough period, immediately post its acquisition of Novelis at US$6.2 bn due to the adverse demand scenario after the financial crises and also due to unfavorable legacy contracts with its customers. Under these contracts, Novelis was not allowed to re-price its conversion premium and in some cases, not allowed to pass through LME prices. This was the primary reason behind the huge pressure on margins and resultant losses. However, those contracts have expired and on the back of a demand recovery, Novelis, with its leadership position, now enjoys pricing power on most of its products. Coupled with this, cost-saving measures have helped the entity see a strong turnaround with higher shipments and stronger operational performances. While Novelis shipments have remained flat during the past few quarters
1000 800 600 400 200 0 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 793 789 772 796 825 808 724 683 756 779 659 651 691 767 751 800 797 765

After expiry of legacy contracts, Novelis continues to deliver superior performance in terms of steady volumes and stronger EBITDA/ tonne

Novelis Shipments (kt)

Source: Company, Emkay Research

Emkay Research

16 December 2011

Hindalco Industries Novelis has been meeting EBITDA guidance for past few quarters and recently it had revised its EBITDA guidance for FY12 at US$1.1- 1.15 bn

Initiating Coverage

During H1FY12, the adjusted EBITDA stood at US$607 mn, in line with the FY12E guidance of US$1.1-1.15 bn. EBITDA/ tonne touched a high of US$418 in Q2FY12. We believe Novelis would continue to deliver good performance as it is largely immune to the LME volatility and also, due to exposure to the value added segment. Novelis currently contributes two- thirds of consolidated revenue. the EBITDA and EBITDA/tonne have been improving
400 399 418 350 393 335 363 353 307 338 300 289 307 323 306 301 250 290 242 280 208 250 263 170 231 260 177 191 200 116 200 199 229 124 189 150 152 95 100 128 88 112 57 50 0 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 450 350 250 150 50 -50

Adj. EBITDA (US$ mn)

Source: Company, Emkay Research

Adj. EBITDA/tonne (US$)

During the period between Q4FY11 and Q2FY12, while the total shipments have taken a marginal dip, the EBITDA/ tonne for Novelis has shown an increasing trend. Instead of looking at total shipments by Novelis, we believe one needs to consider profitability in different geographies, as the EBITDA/ tonne contributions are different for different geographies. Novelis has been focusing on specific geographies which enable it to get better margins. This is also is getting reflected in the increasing EBITDA/tonne.

Debottlenecking in key areas with fresh capacity addition to aid volume growth
Novelis has been executing capacity expansion through debottlenecking across all of its geographical locations with an estimated capex of ~US$80 mn. This is expected to help capacity growth of 3-4% per annum till FY14. The company has a total capex of US$1.5 bn, out of which it plans to use US$900 mn in the following projects and rest would be used as maintenance capex. In South Korea, additional capacity of 350 ktpa would help the company expand its capacity in the Asian region to 1 mtpa by CY13 mainly catering to can body stock, automotive sheet and electronic segments. In North America, additional capacity of ~200 ktpa is slated to come on-stream by mid-2013 taking its global automotive sheet capacity to 400 ktpa. It also has a plan to further double its capacity in the region within three years. Novelis also plans to expand its production of aluminium can sheet in Pinda, Brazil by ~220 ktpa by the end of CY2012. Additional 190 ktpa recycling capacity has also been under consideration and likely to be completed by late CY13. All these initiatives together are expected to increase the overall capacity by 18% by FY14. We believe this would help Novelis increase its shipments, catering to new markets.

Novelis plans to spend US$1.5 bn over next three years to expand its capacity in various geographies

Emkay Research

16 December 2011

Hindalco Industries
Capacity expansion plan of Novelis Through debottlenecking Region North America South America Europe Asia New capacity addition Region North America Pinda, Brazil, SA Korea, Asia Total Additional capacity (KTPA) 200 220 350 Additional capacity (KTPA) 60 30 90 70

Initiating Coverage

Expenditure (US$ mn) FY12 Total

80

80

Expenditure (US$ mn) FY12 80 180 85 345 Total 200 300 400 900

Debt refinancing helped deleveraging standalone balance sheet

Novelis recently replaced its existing US$2.5 bn debt with a debt of US$4 bn at a slightly higher interest rate of ~8%. Novelis plans to repay this debt partially in 2017 (US$1.1 bn) and the rest by 2020. From this, US$1.7 bn has gone to Hindalco and is reported as return to common shareholders in its balance sheet. US$1 bn from this has gone towards repaying Hindalcos acquisition loan. The rest US$700 mn has been paid as dividend to Hindalco. Other than easing of pressure from the standalone balance sheet, the refinancing (on conducive terms) also helped cash fungibility between Hindalco and Novelis and helped avoid financial risk. With a sizable expansion plan in the domestic business, we believe this would help the company maintain the desired liquidity. Table: Hindalco and Novelis debt repayment schedule
Hindalco Rupee-term loan Short-term loan Standalone Hindalco FC Loan at AV Minerals (Guaranteed by Hindalco) Recourse Hindalco Prepaid 72.72 0 0 21.47 25.72 4.25 0 Mar-11 Rs bn 51.43 21.29 72.72 0 0 21.47 25.72 4.25 0 FY12 FY13 Repayments in FY14 21.47 FY15 25.72 FY16 4.25 Post FY16

Novelis ABL (Total Limit US$ 800 mn) Senior Notes Bank Loan Others Total
Source: Company

Mar-11 US$ bn 0.017 2.576 1.458 0.052 4.103 0.015 0.015 0.015 0.015 FY12 FY13

Repayments in FY14 FY15 FY16 Post FY16

0.076 0.015 0.015 0.015

2.500 1.383

0.015

0.091

0.015

3.883

Emkay Research

16 December 2011

Hindalco Industries

Initiating Coverage

Financial Overview
Primary aluminium capacity expansion to drive growth
Hindalco has been in expansion mode -with capacity additions in primary aluminium as well as in rolled products through greenfield and brownfield projects. The brownfield expansion of Hirakud smelter has already begun and the capacity addition of 52 ktpa is set to be completed by early FY13. Owing to delays, we believe the Mahan project will also start contributing by mid FY13. These additions are expected to drive topline growth of 5% CAGR for standalone business and ~6% CAGR for consolidated business for next two years. For Novelis, with stable shipments and overall stable LME the CAGR for the topline is likely to be ~4% during FY11- 13 in USD terms. However, in INR terms this remains ~6%. Standalone sales to grow at 5.4% CAGR during FY11-13E (Rs. bn)
300 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012E 2013E 183 192 182 195 239 249 5.4% CAGR (FY11-13E)

Novelis topline line to grow at ~4% CAGR during FY11-13E (US$ mn)
3.7% CAGR (FY11-13E) 12000

265

10000 8000 6000 4000 2000 0

11246 10177 8673

10577

10991

11370

2008

2009

2010

2011

2012E

2013E

Source: Company, Emkay Research

Source: Company, Emkay Research

Consolidated sales to grow at ~5.9% CAGR during FY11- 13E Higher growth rate in consolidated topline is primarily due to depreciation in INR
900 800 700 600 500 400 300 200 100 0 5.9% CAGR (FY11-13E) 780

(Rs. bn)

808

600

660

721 607

193 2007 2008 2009 2010 2011 2012E 2013E

Source: Company, Emkay Research

Assumptions for FY12E and FY13E

Parameters Sales volume (tonne) Aluminium Total FY12E 522,754 320,000 338,820 3,042 114,000 386,400 3,605 2,275 8,000 48.0 FY13E 650,960 335,000 169,661 3,115 111,625 382,375 3,650 2,250 8,000 47.5

As per Bloomberg the median forecast for Aluminium LME for CY12 and CY13 remain US$2325 and US$2475 respectively

Copper Total Alumina Novelis Shipments (kt) Realization (Rs/ tonne) Aluminium ingots Copper cathode Novelis (US$ / tonne) LME (US$/ tonne) Aluminium Copper Exchange rate (USD/INR)
Source: Company, Emkay Research

The same for copper stand at US$8706 and US$8525 respectively for CY12 and CY13

Emkay Research

16 December 2011

10

Hindalco Industries

Initiating Coverage

Segmental contribution from aluminium and copper businesses

While the revenue contribution from copper business is high (67% in 2011), the EBIT contribution being a custom smelter is very low (only about 23% in FY11), as it essentially depends on the TcRc and by-product contributions. This drags down the overall margins for the standalone business. While Copper standalone revenue contribution is high
300 250 200 150 100 50 0 2007 2008 Aluminium 2009 2010 Copper 2011 73 71 76 70 80 159 110 121 106 125 (Rs bn)

its contribution to earnings is comparatively lower

40 35 30 25 20 15 10 5 0 (Rs bn) 5 5 4 7 6

29

24

22

18

20

2007

2008 2009 Aluminium

2010 Copper

2011

EBITDA to grow gradually supported by Novelis; margins to remain stable

As Hindalco has been a custom copper smelter, contribution from copper business to the margins has been lower as compared to aluminium business. This is why despite earning EBIT margin of 25% in aluminium business, the overall standalone EBITDA margin remains at ~13.5% range. Despite a negative CAGR of ~2% in EBITDA between FY08- FY11 for the standalone business, the consolidated EBITDA grew at a CAGR of ~6.4%. Supported by the increased production of aluminium, the standalone EBITDA is expected to grow at a CAGR of 7%. On the other hand backed by a sharp CAGR of 12% in Novelis the consolidated EBITDA should show a CAGR of 8% during FY11-13. The EBITDA growth rate in Novelis could be higher in INR term. Standalone EBITDA to grow steadily, margin to remain flat
50 40 30 20 10 0 2007 2008 2009 2010 EBITDA (Rs bn) 2011 2012E 2013E EBITDA Margin (%) 40 21.9% 34 17.7% 30 16.7% 29 15.1% 32 33 36 25.0% 20.0% 15.0% 13.4% 13.3% 13.7% 10.0% 5.0% 0.0%

Novelis EBITDA to see improvement with better margins

1400 1200 1000 800 600 400 200 0 2008 2009 2010 EBITDA (US$ mn) 2011 2012E 2013E EBITDA Margin (%) 533 566 5% 6% 1085 935 1020 1168 9% 9% 13% 10% 14% 12% 10% 8% 6% 4% 2% 0%

Source: Company, Emkay Research

Source: Company, Emkay Research

Consolidated EBITDA to grow modestly, margins likely to improve

120 100 80 60 40 20 0 2007 2008 2009 2010 2011 2012E 2013E EBITDA (Rs bn)
Source: Company, Emkay Research

25.0% 97 22.9% 66 44 11.1% 30 4.5% 0.0% EBITDA Margin (%) 16.0% 11.1% 10.7% 11.5% 80 83 93 20.0% 15.0% 10.0% 5.0%

Emkay Research

16 December 2011

11

Hindalco Industries

Initiating Coverage

Consolidated PAT likely to grow at 14% CAGR

While the standalone EBITDA is likely to grow at 6%, the PAT would show a meager CAGR of 3% during 2011-2013E primarily due to higher fixed costs (higher interest costs and depreciation). This however, would be significantly more than compensated by the strong PAT growth (of 73% CAGR) in Novelis. Thus, the performance is likely to be better at the bottomline level on a consolidated basis. We expect the consolidated PAT to grow a CAGR of 14% during FY11- 13. Standalone PAT to remain flat through 2013
35 30 25 20 15 10 5 0 2007 2008 26 14.0% 14.9% 29 16.0% 14.0% 12.2% 12.0% 9.8% 9.0% 8.9% 8.6% 10.0% 22 8.0% 19 6.0% 21 22 23 4.0% 2.0% 0.0% 2009 2010 2011 2012E 2013E PAT Margin (%)

Novelis is likely to see strong bottomline growth

1000 500 0 -500 -1000 -1500 -2000 -2500 PAT (US$ mn)
Source: Company, Emkay Research

10% -117 2008 -1% -1910 2009 405 116 245 348 5% 0% 2010 5% 2011 1% 2012E 2% 2013E 3% -5% -10% -15% -19% PAT Margin (%) -20% -25%

PAT (Rs bn)

Source: Company, Emkay Research

Consolidated PAT to grow at a faster pace

50 40 30 20 10 0 2007 2008 4.0% 5 0.7% 2009 2010 2011 2012E 2013E PAT (Rs bn)
Source: Company, Emkay Research

13.9% 27 24

39 29 25 32

6.5% 3.4%

3.8%

4.0%

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

PAT Margin (%)

Return ratios to improve on a consolidated basis

Due to continuous expansion in domestic business, the return ratios for Hindalco standalone business have remained low in the past few years and are expected to remain so till FY13. On a consolidated basis however, RoE is likely to improve from the current levels. Hindalcos standalone business is basically a margin driven business, whereas in case of Novelis, the focus is on per tonne profitability, as it is essentially a converter of primary aluminium into value-added products. Thus on a consolidated basis, lower return ratios might not be a true reflection of the companys operational efficiency. Standalone returns to remain low
25.0 20.0 15.0 10.0 5.0 0.0 2007 2008 2009 RoCE 2010 2011 2012E RoE 2013E 16.6 10.4 9.4 7.1 6.9 6.4 7.2 6.5 7.0 5.8 6.8 5.6 20.7 16.4

but consolidated returns to improve gradually

25.0 20.0 15.0 10.0 5.0 0.0 -5.0 2007 2008 15.7 13.9 7.4 3.1 -0.1 2009 RoCE 13.6 8.5 8.4 9.3 7.0 9.3 7.2 21.0 18.2

2010

2011

2012E RoE

2013E

Source: Company, Emkay Research

Source: Company, Emkay Research

Emkay Research

16 December 2011

12

Hindalco Industries

Initiating Coverage

Valuation
Hindalco is a leading domestic aluminium producer with fully integrated operations across the value chain and falls in the first quartile of the cost of production. Novelis has been performing well and is largely immune to fluctuations in LME prices. Copper operations are steady and the contributions from its by-products are significant. With an ambitious growth pipeline entailing a threefold capacity expansion in the domestic operations, it would find a place among the top aluminium producers in the world. Hindalco has demonstrated a successful turnaround in Novelis through its cost cutting measures with savings of US$140 mn during FY10 and also, due to expiry of unfavorable contracts followed by impressive performance in subsequent quarters. Domestic business, on the other hand, has come under pressure at the operational level during last couple of years due to sharp cost escalation of raw materials, mainly coal. Thus, despite a negative CAGR of 2% and 10% in EBITDA and PAT between FY08-FY11 for the standalone business, the consolidated entity reported a CAGR of 6.6% and 1.4% for EBITDA and PAT respectively. This is primarily due to the contribution of Novelis. We believe that while the standalone EBITDA and PAT will grow at a CAGR of 6.6% and 3%, consolidated business will witness an EBITDA and PAT growth of 8% and 14% respectively during FY11-13E period. Hindalco has been trading in a band of 2x-18x 1yr. fwd PE
500 400 (In Rs) 300 200 100 0 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11

It has been trading between 2x-9x 1yr. forward EV/EBITDA

1000000 EV (Rs mn) 800000 600000 400000 200000 0 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
EV 9x 7x 5x 2x
Source: Company, Emkay Research

Price

18x

14x

10x

6x

2x

Source: Company, Emkay Research

The major long- term growth trigger for the company would be huge capacity expansion in the Alumina and Aluminium businesses. However, the company has been facing few concerns related to raw material security. Hindalco was also allotted a coal mine under Mahan project along with Essar Power which is under review by MoEF (Ministry of Environment and Forest).

Emkay Research

16 December 2011

13

Hindalco Industries

Initiating Coverage

At the CMP of Rs 126, the company discounts its FY12E and FY13E EPS by 8.7x and 7.8x respectively. On EV/EBITDA basis, the company trades at 5.8x and 5.4x for FY12E and FY13E respectively. While major global aluminium peers, on an average basis, are trading at 14.5xFY13 EPS and 6.9xFY13 EV/EBITDA, major global copper peers are trading at an average 7.6xFY13 EPS and 4.7xFY13 EV/EBITDA. Looking at Novelis pricing power and its imperviousness to LME fluctuations to a large extent, we believe it deserves a better multiple compared to most of its global peers. On a SOTP basis, we have valued Hindalcos standalone business, ABML and Novelis at 5.5x and 5x and 6xFY13E EV/EBITDA respectively, which translates into a fair value of Rs 154 per share, providing an upside of 22%. We initiate our coverage on Hindalco with a ACCUMULATE recommendation.
FY13 EBITDA (Rs mn) Standalone business Novelis ABML (51%) 36,221 51,721 4,174 Multiple 5.5 6 5 EV (Rs mn) 199,213 310,323 10,645

Total EV Net debt Market cap Per share value Value of investment (20% discount) Fair value (Rs/ share)

520,181 254,058 266,123 139 15 154

Global peers Aluminium and Copper producers

Company Aluminium Alcoa Inc Chalco Norsk Hydro BHP Billiton Average Copper Freeport-Mcmoran Jiangxi Copper Xstrata Plc Grupo Mexico Aurubis Ag Average
Source: Bloomberg, Emkay Research

Market cap (USD mn)

PE CY12E CY13E

P/BV CY12E CY13E

EV/EBITDA CY12E CY13E

ROE CY12E CY13E

9,621 12,621 9,242 177,588

11.10 29.82 12.76 8.44 15.53

9.48 27.96 12.38 7.97 14.45

0.68 0.72 0.65 2.65 1.18

0.63 0.69 0.63 2.11 1.02

6.12 13.11 4.30 4.45 7.00

5.71 12.58 5.20 4.20 6.92

6.11 2.95 9.82 35.14 13.51

6.70 3.89 5.45 29.55 11.40

35,812 10,641 43,845 20,990 2,316

7.61 6.50 7.21 9.05 7.70 7.61

7.88 6.48 6.40 8.43 8.84 7.61

2.32 1.21 0.95 2.98 1.02 1.70

1.94 1.08 0.84 2.50 0.95 1.46

3.57 6.87 4.53 4.55 4.42 4.79

3.61 6.81 4.13 4.24 4.50 4.66

31.67 19.37 13.85 35.98 14.73 23.12

25.10 17.85 14.70 33.10 10.77 20.30

Domestic peers Non-ferrous players

Company Sterlite Ind. HZL NALCO Ess Dee Al. Average Market cap (INR mn) 334,053 517,813 132,212 4,326 PE FY12E 5.73 9.18 8.62 3.55 6.77 FY13E 5.06 8.17 9.41 2.90 6.39 P/BV FY12E 0.70 1.88 0.52 1.03 FY13E 0.62 1.57 0.44 0.88 EV/ EBITDA FY12E 4.33 5.83 3.86 3.42 4.36 FY13E 3.72 5.15 4.20 2.79 3.97 ROE FY12E 13.14 21.98 15.15 16.76 FY13E 13.54 20.51 15.87 16.64

Source: BSE, Bloomberg, Emkay Estimates; Bloomberg Consensus.

Emkay Research

16 December 2011

14

Hindalco Industries

Initiating Coverage

Risks and Concerns

Project delays
Many of the projects have been facing delays due to various factors mainly supply shortage of coal. Hindalco had announced its greenfield expansion plan in FY07-08 with initial capacities were kept at 325 ktpa aluminium smelter and 725 MW power plant in each of the projects. Subsequently, these planned capacities were raised to 359 ktpa with 900 MW CPPs. Utkal alumina refinery project, with 1.5 mtpa capacity, was initially scheduled to be completed by March 2010, which pushed further to July 2011. Now schedule commissioning of Mahan and Utkal projects are due late FY12 and FY13 respectively. The company has been maintaining that both Utkal and Mahan projects are currently on track and would be completed without further delay. Since Mahan coal project is still facing a lot of uncertainties, we feel the company might have to procure coal from the open market primarily through e-auction and import adversely impacting overall costs.

While Hindalcos performance has been stable, the delays in upcoming projects have resulted in cost overruns and margin pressures

Volatile prices
While increase in aluminium and copper LME prices can bring about a significant improvement, a sharp fall in these prices may adversely affect the company profitability as well as topline. Since the beginning of FY12, copper and Aluminium LMEs have fallen by 19% and 22% to US$7,586/tonne and US$2021/tonne respectively. However, the YTD averages for copper and aluminium stand at US$ 8,601/tonne and US$ 2,383/tonne against FY11 averages of US$8,140/tonne and US$2,257 respectively. Among these two, Hindalco has a greater dependency on aluminium LME. Thus, a continued downward movement in aluminium LME may result in earnings downgrade for all aluminium businesses. On the other side, being largely a custom smelter, a contraction in TcRc and any significant fall in by-product realizations would weigh heavily on the margins.

Exchange rate
Aluminium and copper are denominated in USD and are widely traded across the world. An adverse movement of USD/INR rates (which, in case of Hindalco would be appreciation of INR against US Dollar) would reduce the realization of these metals in INR terms and would hence impact profitability for the company.

Emkay Research

16 December 2011

15

Hindalco Industries

Initiating Coverage

Industry Brief
Global economic recovery short-term challenges
Aluminium During FY11, aluminium prices averaged at US$2,257/tonne and FY12 began on a strong note with average price in Q1 at US$2,603/ tonne. Aluminium, being closely linked to economic growth, has certainly borne its fair share of the impact of global weakening sentiment, pushing cash prices down to US$1,977/tonne as on November 30, 2011. At these levels, the LME breached the marginal cost of production for ~60% of the smelters. This, we believe will help aluminium prices to consolidate around US$1,9002,000 before gradually moving upwards led primarily by better annual consumption growth estimated at 6.5% surpassing annual production growth of 5.7%. We assume the LME for FY12 and FY13 to be US$2,275/tonne and US$2,250/tonne respectively. Aluminium prices and LME warehouse stock
3500 3000 2500 2000 1500 1000 500 0 May-08 Aug-08 Aug-07 Nov-07 Nov-08 Feb-09 Feb-08 Mar-11 Apr-09 Oct-09 Jan-10 Apr-10 Jun-11 Sep-11 Jul-09 Jul-10 Sep-10 Dec-10 Dec-11 6000000 5000000 4000000 3000000 2000000 1000000 0

While FY12 Aluminium prices began with a strong note, they have corrected sharply the year so far

(In $/tonne)

Al-LME Inventory (R.H.S)

Source: Bloomberg, Emkay Research

Al-LME (L.H.S)

The three month aluminium price is in contango with premium of just US$2/tonne against a year to date average of ~US$20/tonne. The LME aluminium stocks are currently at an all time high of 4.8m tonnes. On the global front, China's aluminium smelters may keep yearly contracts for alumina imports low next year due to rise in its domestic production increases and prices. Term alumina to China for CY12 shipments is being indicated at about 15.5% to 16.0% of the price of primary aluminium on the London Metal Exchange after India's state-run National Aluminium Co Ltd sold 300,000 tonnes at about 16% during Sep 2011. Major Chinese importers have paid 14.8-15.5% for 2011 shipments of Australian alumina on a free-onboard basis versus 14.5-15% in 2010. China's 46 mn tonnes of yearly alumina capacity would produce 95% of the alumina requirement this year due to expanded capacity.

Emkay Research

16 December 2011

(In tonne)

16

Hindalco Industries Geography wise production and consumption of Aluminium

Initiating Coverage

CAGR CY06 Aluminium Production (kt) Africa North America Latin America Asia (ex. China) Western Europe Australasia China CIS and Eastern Europe Total Aluminium Consumption North America Asia (ex. China) Western Europe China Others Total Implied surplus (deficit)
Source: Industry, Emkay Research

CY07 1,815 5,545 2,557 3,504 4,664 2,314 12,607 5,001 38,007

CY08 1,715 5,783 2,660 3,700 4,840 2,296 13,076 5,269 39,339

CY09 1,681 4,850 2,508 4,321 3,964 2,211 13,550 4,745 37,830

CY10 1,824 4,690 2,494 5,089 4,089 2,277 16,404 4,798 41,665

CY11E 1,935 4,966 2,368 5,929 4,103 2,228 17,821 5,028 44,378

CY12E 2006-12E 2,052 5,345 2,548 6,379 4,369 2,273 18,240 5,309 46,515 1.6% 0.0% 0.4% 11.6% -0.6% 0.0% 11.8% 1.9% 5.4%

2006-10 2010-12E -0.5% -3.2% 0.0% 11.5% -2.6% 0.0% 15.1% 0.3% 5.3% 6.1% 6.8% 1.1% 12.0% 3.4% -0.1% 5.4% 5.2% 5.7%

1,864 5,332 2,493 3,296 4,541 2,274 9,349 4,735 33,884

7,653 6,960 7,055 8,480 4,098 34,246 -362

7,526 7,100 7,244 11,497 4,187 37,554 453

6,913 7,140 7,256 12,934 4,288 38,531 807

5,043 6,675 5,900 14,100 4,163 35,881 1,949

5,547 7,200 6,786 16,814 4,330 40,677 988

5,769 7,495 7,023 18,681 4,602 43,570 808

5,890 7,735 7,164 20,549 4,790 46,128 387

-4.3% 1.8% 0.3% 15.9% 2.6% 5.1%

-7.7% 0.9% -1.0% 18.7% 1.4% 4.4%

3.0% 3.6% 2.7% 10.6% 5.2% 6.5%

Copper prices and TcRc movement

During FY11, copper prices averaged at US$ 8,140/tonne with Q4FY11 witnessing high prices at US$9,651/tonne. During FY12, copper prices have been steadily declining with Q1 price at US$9,152/tonne, Q2 price at US$8,992/tonne and currently at US$7,586/ tonne. The production (mine as well as refined) and consumption growth figures for copper stand at 3.9% and 4.3% respectively. Copper prices and LME warehouse stock
12000 10500 9000 7500 6000 4500 3000 1500 0 Mar-10 Mar-11 Sep-07 Aug-11 Nov-10 Oct-08 Feb-09 Oct-09 Jul-10 Dec-11 Jan-08 Jun-08 Jun-09 600000 500000 400000 300000 200000 100000 0

(US$/tonne)

Copper-LME Inventory (R.H.S)

Source: Bloomberg, Emkay Research

Copper-LME (L.H.S)

Though TcRcs began on a strong note in FY12 with couple of Japanese smelter closures after the March 2011 earthquake, a series of mine strikes that caused disruptions in the concentrate market have tightened TcRcs off late. Also, on the supply side, it looks like yet another disappointing year with mine output now likely to come in flat at best. African production is also falling behind our expectations, as Zambian growth has stuttered and slipped below government targets this year.

Emkay Research

16 December 2011

(tonne)

17

Hindalco Industries Geography wise production and consumption of copper

Initiating Coverage

CAGR CY06 Copper Mine production (kt) Total Year-on-year % change Copper Refined production (kt) Africa North America Latin America Asia (ex. China) China Australasia Europe Total Copper Refined consumption (kt) North America Latin America Asia (ex. China) China Europe Others Total Implied surplus (deficit)
Source: Industry, Emkay research

CY07 15,483 3.30%

CY08 15,546 0.40%

CY09 15,950 2.60%

CY10 16,097 0.90%

CY11E 16,443 2.10%

CY12E 2006-12E 17,383 5.70% 2.5%

2006-10 1.8%

2010-12E 3.9%

14,990 0.50%

563 2,155 3,553 4,200 3,047 429 3,605 17,552

627 2,175 3,595 4,330 3,497 442 3,620 18,286

680 2,210 3,535 4,340 3,779 502 3,710 18,756

770 2,060 3,600 4,030 4,252 446 3,560 18,718

922 2,080 3,660 4,100 4,800 430 3,610 19,602

1,020 2,110 3,725 4,160 5,184 455 3,660 20,314

1,200 2,135 3,818 4,210 5,547 480 3,760 21,150

13.4% -0.2% 1.2% 0.0% 10.5% 1.9% 0.7% 3.2%

13.1% -0.9% 0.7% -0.6% 12.0% 0.1% 0.0% 2.8%

14.1% 1.3% 2.1% 1.3% 7.5% 5.7% 2.1% 3.9%

2,863 554 4,680 3,820 5,208 343 17,468 84

2,805 568 4,900 4,525 5,155 350 18,303 -17

2,720 580 4,860 4,930 5,050 352 18,492 264

2,610 560 4,500 5,670 4,545 340 18,225 493

2,690 580 4,950 6,294 4,795 351 19,660 -58

2,750 610 5,198 6,703 4,891 362 20,513 -199

2,778 640 5,405 7,239 4,964 366 21,392 -242

-0.5% 2.4% 2.4% 11.2% -0.8% 1.1% 3.4%

-1.5% 1.2% 1.4% 13.3% -2.0% 0.6% 3.0%

1.6% 5.0% 4.5% 7.2% 1.7% 2.1% 4.3%

Top aluminium producing companies in the world (2010)

5,000 4,083 3,790 3,444 4,000 3,000 2,000 1,000 0 BHP China Po. Rio Tinto Al.China Norsk Rusal Shandong Dubai Al. Al. Bah Alcoa 2,940 1,505 1,242 1,170 957

Top copper producing companies in the world (2010)

2,000 1,864 1,500 1,000 1,132

1,013

901 753

864 862

615 587 578

500 0 BHP Codelco Jiangxi Freeport Glencore Xstrata Nippon

550 550

Sumitomo

Aluminium Production 2010 (kt)

Source: Bloomberg, Emkay Research

Aurubis

Refined Copper Production 2010 (kt)

Source: Bloomberg, Emkay Research

Emkay Research

16 December 2011

Grupo Mexico

18

Hindalco Industries

Initiating Coverage

Annexure I
Aluminium manufacturing process
2 tonnes of alumina required to produce 1 tonne of aluminium ~15,000 units of power required to produce 1 tonne of aluminium

Mining of Bauxite ore, ~2 tonnes of bauxite to give 1 tonne of alumina

Bauxite ore is refined into alumina

Alumina is reduced to aluminium by the process of electrolytic reduction

Aluminium is mixed with various alloys depending on product to be made

Aluminium items junked or scrapped are melted down for reuse

Aluminium is shipped - cut, bent, shaped into various products

Emkay Research

16 December 2011

19

Hindalco Industries

Initiating Coverage

Annexure II
Company background
Hindalco embarked on its journey in 1958 and its first major project was setting up India's first integrated aluminium facility at Renukoot in 1962. It was backed by a captive thermal power plant at Renusagar in 1967. Hindalco steadily attained leadership position in the Indian aluminium and copper industry, thereafter. This was achieved in part by expansion through mergers and acquisitions with companies such as Indal and Birla Copper. Hindalco also secured copper reserves and amplified its operating base by acquiring the Australian Nifty and Mt. Gordon copper mines. Over the years, Hindalco has grown into one of the largest vertically integrated aluminium producers in Asia. Its copper smelter is today, one of the world's largest custom smelter at a single location. In 2007, the landmark acquisition of Novelis Inc., the world's largest aluminium rolling company, placed Hindalco's footprint across the globe, securing it a rank amongst the top five global aluminium majors and also placing it in the Fortune 500 league.

Novelis Inc.
Novelis Inc. is one of the world's leading aluminium rolled products producer. The company produces high-quality aluminium sheet and foil products for customers in high -value markets including automotive, transportation, packaging, construction and printing. It is the top producer in Europe and South America, and the second largest in North America and Asia. In its 2011 fiscal year, the company shipped 3.1 mt of aluminium products and reported net sales of approximately USD 10.6 bn.

Novelis operations

Novelis

North America (FY11 Shipments 1,121 kt)

Europe (FY11 shipments 976 kt)

Asia (FY11 shipments 581 kt)

South America (FY11 shipments 419 kt)

100% Holding - 11 FRP Plants

40% Affiliate Logan, Kentucky

100% Holding - 13 FRP Plants

50% JV Norf, Germany

59% Subsidiary Bukit Raja, Malaysia

68% Subsidiary, Ulsan, Korea

68% Subsidiary, Yeongju, Korea

100% Holding - 2 FRP Units

Source: Company, Emkay Research

Aditya Birla Minerals Ltd.

Aditya Birla Minerals Ltd. is the largest pure copper company listed on the Australian Stock Exchange. Hindalco Industries Ltd. owns 51% of Aditya Birla Minerals Ltd. (ABML), a company having 100% holding in Birla Nifty Pty Ltd. and Birla Mt. Gordon Pty Ltd. located in Western Australia and Queensland, respectively. ABML, an S&P ASX 300 Index company, is the largest pure copper company listed on the Australian Stock Exchange. Mines in Australia - Net Profit at AUD 57 mn against AUD 61 mn in FY10

Emkay Research

16 December 2011

20

Hindalco Industries

Initiating Coverage

Copper mines in Australia - Nifty and Mount Gordon

Hindalco acquired Nifty and Mt. Gordon mines in 2003. The Birla Nifty copper mine consists of an underground mine, heap leach pads and a solvent extraction and electrowinning (SXEW) processing plant, which produces copper cathode. The Mt. Gordon mine consists of an underground mine and a copper concentrate plant. Both Nifty and Mt. Gordon have a long-term life of mine off-take agreement with Hindalco for supply of copper concentrate to the copper smelter at Dahej. These together contribute to ~17% of the total concentrate requirement of copper smelter at Dahej. While the Nifty mine is stabilizing recovery at ~93% and has recoded an all time high copper production of 59,661 MT in 2011, the Mt. Gordon mine has received its final approval and its gradual ramp-up process has commenced as per the plan.

Successful turnaround of Novelis

With the consolidation of aluminium industry, especially in FRP, Novelis gained a significant control over product pricing. In CY09, Novelis restructured its operations and this resulted in a saving of about US$ 140 mn in CY09. This also helped Novelis reduce its cost of operations. This pricing power, coupled with cost savings has helped Novelis improve its margins and will further enhance the margins in the coming years. Novelis net income has increased from loss of USD 1,910 mn in FY09 to profit of USD 160 mn in FY11 on account of this successful turnaround of operations. Novelis recently replaced its existing USD 2.5 bn debt with a debt of USD 4.0 bn at a slightly higher interest rate of ~8.0%. Novelis plans to repay this debt partially in 2017 (USD 1.1 bn) and the rest in 2020. From this, USD 1.7 bn has gone to Hindalco and is reported as return to common shareholders in its balance sheet. USD 1 bn from this has gone in repaying Hindalcos acquisition loan. The rest USD 700 mn has been paid as dividend to Hindalco. After being hurt badly by the financial meltdown, Novelis has been reporting positive EBITDA figures since Q4FY09 primarily aided by the expiry of ceiling contracts (wherein one can not contractually pass on price increases to various customers). This has led to an improvement in cash flows and is expected to ease down the debt burden in the balance sheet. Novelis has successfully refinanced its entire loan of US$ 2.5 bn in FY11 with a new loan of US$ 4 bn with favorable covenants. This also helped standalone entity to get a return on capital of US$ 1.7 bn, thereby reducing its balance sheet concerns.

Hindalco Management profile

Hindalcos management team consists of experienced individuals with strong credentials. Mr. Kumar Mangalam Birla is the Chairman while Mr. D. Bhattacharya is the Managing Director. Mr. S Talukdar is the CFO and Mr. Anil Malik is the Company Secretary. Mr. Philip Martens is the President and CEO of Novelis Inc. The employee strength of the company is 34,000 people from 15 different nationalities. The group company was rated as the second best employer amongst 200 emerging companies by Hewitt Global.

Brownfield Projects
Hindalcos ongoing brownfield expansion plans are progressing well notwithstanding the various political, social and macroeconomic challenges. The company is confident that it will achieve its plans in the revised timelines. The various brownfield expansions in execution and that the company is currently pursuing are listed below. Hirakud Smelter 51,600 tpa expansion and 100 MW captive power plant Hirakud smelter capacity was raised from 155,000 tpa to 161,400 capacity in Q4FY11. By 2012 end, another 51,600 tpa capacity is scheduled to be added to Hirakud plant (which will take the total capacity at Hirakud to 213,000 tpa) along with a 100 MW captive power plant. The next phase of expansion at Hirakud is planned to increase its capacity to 360 ktpa along with a corresponding increase in captive power from 467.5 MW to 967.5 MW. The environmental clearance for this is already in place Emkay Research 16 December 2011 21

Hindalco Industries Hirakud FRP project Transfer from Novelis plant to Hirakud

Initiating Coverage

This project involves transfer of all key equipment for FRP production from Novelis plant at Rogerstone, UK to Hirakud. Also, orders placed for related and balancing equipment will enable the company produce superior engineering products, including can-body stock, for various markets. This project is expected to be complete by Q4FY12 or early FY13. Belgaum Special Alumina Expansion of specials plant to 301 ktpa The specials plant capacity at Belgaum will be raised from 189 ktpa to 301 ktpa, along with a coal based co-generation plant. Currently, natural gas adaptation for its rotary kilns is being evaluated. Novelis South America and Asia The company plans to invest USD 300 mn to expand the aluminium rolling operations in Pinda to about 600 kt of aluminium sheets per year. This project is expected to come on stream by 2012. Novelis has announced plans to invest USD 400 mn in aluminium rolling and recycling operations in South Korea. This will increase aluminium sheet capacity in Asia to 1,000 kt annually. The new capacity is expected to be commissioned in financial year 2013

Greenfield Projects
Like the brownfield expansions, the greenfield expansions too are being executed as per the plans. There had been some delays in the greenfield expansions in the past two years due to various regulatory issues and concerns related to coal sourcing, but we feel that the contribution from these projects should start by FY13 end with the commissioning of Mahan smelter. The various greenfield projects under execution and in planning phase are mentioned below. Mahan Aluminium 359,000 tpa smelter and 900 MW power to start commissioning during 4QFY12 Hindalco is set to start commissioning a 359,000 Aluminium smelter along with a captive power plant of 900 MW during Q4FY12 at Bargwan, Madhya Pradesh. The estimated capex for the project is about Rs 105 bn, of which Rs 77.85 bn is being financed by debt (Rs 60 bn has already been drawn down). The major setback for the project lies in the fact that the coal block of Mahan still awaits MoEF clearances. Hindalco will have to either source coal from linkages or will have to import coal till clearances are received and coal mine is developed. This may result in significantly higher operating cost. Utkal Alumina 1.5 mn tpa refinery and 90 MW captive cogeneration plant by CY12 Hindalco is in the process of setting up a 1.5 mtpa alumina plant along with a 90 MW captive cogeneration plant in Utkal, which having received all the clearances and license for mining, is expected to be on stream by Q4FY13,. The output from Utkal plant will feed alumina to the Mahan and the Aditya smelters. The estimated project cost for Utkal plant is about Rs 72 bn, of which Rs 49.06 bn will be financed through debt (Rs 40 bn has already been drawn down). Captive bauxite mines of Utkal alumina project are located at Baphlimali hills of Kashipur block in Rayagada district of Orissa state. Aditya Aluminium, Aditya Refinery and Jharkhand Aluminium Aditya Aluminium involves addition of 359,000 tpa smelter and 900 MW of power by 4QFY13. All major approvals are already in place for the project. The total estimated cost of the project is Rs 105 bn. Aditya Refinery includes a 1.5mn tpa refinery and 90 MW cogeneration plant to be completed by 2014 in Orissa. The estimated project cost is about Rs 60 bn. Jharkhand Aluminium involves addition of 359,000 tpa smelter and 900 MW of power by 2015 in Sonahatu, Jharkhand. The estimated project cost is about Rs 105 bn.

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Financials
Income Statement
Y/E, Mar (Rs. mn) Net Sales Growth (%) Expenditure Raw Materials Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT (Profit)/loss from JV's/Ass/MI Adjusted PAT after MI Growth (%) Net Margin (%) E/O items Reported PAT Growth (%) FY10 607,221 -7.9 509,763 381,004 50,650 78109 97,458 228.2 16.0 27815.0 69,643 11.5 3227.1 11041.4 61,829 18289 29.6 43,540 -4263.8 39,276 698.1 6.5 -21.00 39,255 711.2 FY11 720,779 18.7 640,762 474,163 55,933 110666 80,017 -17.9 11.1 27500.1 52,517 7.3 4308.5 18393.4 38,432 9638 25.1 28,794 -4229.8 24,564 -37.5 3.4 0.00 24,564 -37.4 FY12E 779,536 8.2 696,211 493,215 63,923 139074 83,325 4.1 10.7 31208.1 52,116 6.7 6000.0 16144.5 41,972 10493 25.0 31,479 -2009.2 29,470 20.0 3.8 0.00 29,470 20.0 FY13E 808,267 3.7 714,945 506,018 65,281 143646 93,322 12.0 11.5 35201.3 58,120 7.2 6000.0 17904.5 46,216 11554 25.0 34,662 -2570.7 32,091 8.9 4.0 0.00 32,091 8.9

Balance Sheet
Y/E, Mar (Rs. mn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax lia Total Liabilities Gross Block Less: Depreciation Net block CWIP Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Total Assets FY10 1984 213,462 215,446 17371.80 107,627 132,360 239,987 39382.00 512,187 456,221 166,216 290,005 58008.00 112,455 231,884 112,754 65,437 21,954 31,171 569 180,166 130,996 49,170 51,718 512,187 FY11 1990 288,243 290,233 22169.40 137,358 139,562 276,920 37595.90 626,918 482,068 158,014 324,053 131307.70 108,549 279,848 140,956 79,996 25,563 31,989 1,345 216,840 164,692 52,149 63,008 626,918 FY12E 1990 314,367 316,357 22169.40 227,358 139,562 366,920 37595.90 743,042 547,068 189,223 357,845 191307.70 118,549 296,833 149,500 85,429 24,253 36,307 1,345 221,493 179,654 41,839 75,340 743,042 FY13E 1990 343,112 345,102 22169.40 267,358 139,562 406,920 37595.90 811,787 617,068 224,424 392,644 211307.70 128,549 306,890 155,010 88,577 24,313 37,645 1,345 227,603 184,704 42,900 79,287 811,787

Cash Flow
Y/E, Mar (Rs. mn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend Paid & Others Financing Cashflow Net chg in cash Opening cash position Closing cash position FY10 61,808 27,815 11,041 -38,891 -5,984 -6,353 49,437 -22,539 26,897 3,227 -16,143 -54,484 27,543 -3,209 -16,771 -3,274 4,284 -764 21,820 21,858 FY11 38,432 27,500 18,393 -1,900 -7,031 -13,131 62,263 -99,146 -36,883 4,309 5,074 -67,104 99 37,384 -25,410 -3,838 8,253 3,413 21,858 25,467 FY12E 41,972 31,208 16,144 -2,009 -13,643 -10,493 63,179 -125,000 -61,821 6,000 -10,000 -135,000 0 90,000 -16,144 -3,346 70,510 -1,311 25,467 24,157 FY13E 46,216 35,201 17,904 -2,571 -3,886 -11,554 81,311 -90,000 -8,689 6,000 -10,000 -100,000 0 40,000 -17,904 -3,346 18,750 61 24,157 24,217

Key Ratios
Y/E, Mar Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV/ EBITDA Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA 0.5 1.1 0.5 1.8 0.7 2.7 0.7 2.7 7.3 4.6 1.3 0.6 4 16.5 7.8 1.4 0.8 6.9 8.7 4.2 0.8 0.6 5.8 7.8 3.7 0.7 0.6 5.4 22.2 35.0 121.6 1.5 12.8 27.2 151.6 1.5 15.4 31.7 165.3 1.5 16.8 35.1 180.3 1.5 16.0 6.5 13.6 18.2 7.7 11.1 3.4 8.4 8.5 3.9 10.7 3.8 7.0 9.3 4.0 11.5 4.0 7.2 9.3 4.0 FY10 FY11 FY12E FY13E

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Emkay Rating Distribution

BUY ACCUMULATE HOLD REDUCE SELL Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months. Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months. Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months. The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months.

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