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STOCK INFO. BLOOMBERG REUTERS CODE
BSE Sensex: 20,876 HNDL IN S&P CNX: 6,276 HALC.BO
10 November 2010
Previous Recommendation: Buy
Equity Shares (m) 52-Week Range (Rs) 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)
1,984.4 239/125 3/13/53 452.4 10.2
Hindalco's subsidiary Novelis reported adjusted EBITDA of US$290m against our est. of US$250m (up 47% YoY and up 10% QoQ). Total shipments increased 6% YoY to 767,000 tons but declined 2% QoQ due to a 12-day strike at its Korean plant. Volumes in North America and Europe increased 10-12% YoY due to higher demand particularly from the automobile sector. EBITDA per ton increased for the sixth consecutive quarter to US$378/ton due to continued strong demand, product portfolio optimization and tight control over costs. Novelis plans to increase capacity by 20% over FY11-14 through de-bottlenecking and new capacity at Pinda in Brazil. The 220ktpa Pinda project is expected to be completed by 3QCY12. Aluminum production at Indian operation declined 12% YoY to 123k tons due to power outage at the Hirakud smelter during 2QFY11. The smelter is expected to be fully normalized by early 4QFY11. Production disruption and higher prices of inputs like CPC and furnace oil resulted in higher operating costs. Segmental EBIT of copper declined 41% YoY (flat QoQ) to Rs1.3b due to lower TcRc margins. Copper production increased 5% YoY to 94k tons. Novelis pricing environment favorable; raising LME estimates; upgrading earnings The pricing environment for Novelis remains positive due to tight supply side conditions globally. We are upgrading our FY11 EBITDA estimates for Novelis from US$910m to US$1.1b due to strong quarterly performance and continued positive traction. We have also incorporated higher LME prices (US$2,200/t; raised by 10%) to model stronger base metal prices driven by a second round of quantitative easing. Consequently we are upgrading consolidated FY11 EPS by 23% to Rs18.5 and FY12 EPS by 10% to Rs19.5. The stock trades at an EV/EBITDA of 6.9x FY11E and 6.4x FY12E. We are raising our target price from Rs230 to Rs260 based on 7x FY12E EV/EBITDA. We have toned down our target EV/EBITDA multiple from 7.5x to 7x due to an upgrade in LME assumptions and the best ever performance of Novelis. Maintain Buy.
Sanjay Jain (SanjayJain@MotilalOswal.com);Tel:+912239825412/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com); +9122 39825425
3% YoY and declined 1. Europe and Asia. adjusted EBITDA US$290m Hindalco's subsidiary Novelis posted strong 2QFY11 adjusted EBITDA of US$290m against our estimate of US$250m (up 47% YoY and up 10% QoQ).2% QoQ to 737k tons. FRP volumes increased 6. product portfolio optimization and tight control over costs. Total shipments increased 6% YoY to 767. but declined in South America. This will allow incremental production of higher margin products within European operations and cost savings of about US$15m. Volumes in North America and Europe increased 10-12% YoY due to higher demand particularly from the automobile sector.000 tons. This is expected to be made up in 2HFY11. EBITDA per ton continued to increase for the sixth consecutive quarter to US$378/ ton due to continued strong demand. EBITDA per ton US$378.Hindalco Novelis posts best ever results. Novelis posts strong growth in operating cash flow (US$ m)… 400 200 0 -200 -400 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 263 229 183 131 152 127 88 53 124 218 231 200 199 1QFY11 … and in adjusted EBITDA (US$ m) 290 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 Source: Company/MOSL Novelis has announced closure of Bridgnorth plant. Shipments were 2% lower QoQ due to lower shipments in Asia because of a 12-day strike at its Korean plant. Segmental income increased sequentially across North America. 2QFY11 2QFY11 10 November 2010 2 .
Total cash and cash equivalents increased by US$93m QoQ to US$512m at end 2QFY11. Novelis has planned a 20% increase in capacity over FY11-14 through de-bottlenecking and new capacity addition at Pinda in Brazil. 10 November 2010 3 . Novelis is deploying cash generated from strong operating performance in reducing high cost working capital financing. leading to improved RoCE. shipments stabilize EBITDA/ton (US$) 825 806 691 643 273 166 12 1QFY09 2QFY09 3QFY09 61 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 724 683 291 306 338 378 756 Shipments (ktpa) 779 767 658 268 240 Segmental income improves (US$ m) 150 100 50 0 -50 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 North America Europe Asia South America Source: Company/MOSL Novelis to add 20% production capacity with de-bottlenecking and Pinda Demand for rolled products is strong due to strong demand from the automobile industry in Europe and Asia and industrial products in Asia and North America.1b after incurring Capex of US$37m and working capital increase of US$83m. De-bottlenecking projects across its facilities worldwide will expand production capacity by ~300k tons a year at marginal capex of US$80m. Novelis expects to meet the Capex target as most of the capex will be back ended. Capex during 1HFY11 was US$71m vs FY11 target of US$250m as Novelis deferred some of the shutdowns for de-bottlenecking to meet strong demand from its customers. EBITDA per ton improves. The 220ktpa Pinda project is expected to be completed by 3QCY12.Hindalco Net debt came down by US$97m QoQ to US$2. FRP demand is expected to post 6% CAGR to reach 22mt over 2010-15.
Reported EBIT of Rs4. The smelter is expected to be fully normalized by early 4QFY11. A breakdown of a cooling tower at sulfuric acid plant number 3 in November 2010 will result in production loss of 8. though the appreciation of the rupee against the US dollar eroded nearly 4% gains. Interest costs were lower by 21% YoY at Rs526m due to lower interest and finance charges. Aluminum production declined 12% YoY to 123k tons (better than our estimate of 118k tons) due to power outage at the Hirakud smelter.Hindalco Incremental capacity through Pinda expansion and de-bottlenecking Source: Company/MOSL Hindalco standalone results highlights Hindalco's standalone 2QFY11 adjusted PAT increased 28% YoY to Rs4.24b had non-recurring VRS expense of Rs220m. Segmental EBIT of copper declined 41% YoY (flat QoQ) to Rs1. Share of aluminum in segmental revenue (Rs b) falls due to lower volumes Aluminium Copper 27 21 36 22 25 34 34 33 33 19 20 21 16 14 19 20 17 19 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 Source: Company/MOSL 10 November 2010 2QFY11 19 40 4 .6b against our estimate of Rs5. Segmental EBIT of the aluminum segment rose 72% YoY to Rs4. Copper production increased 5% YoY to 94k tons.9b) due to 14% higher average LME. Reported PAT of Rs4. Net sales rose 19% YoY to Rs58. Disruption of production (down 12% YoY) at Hirakud and higher prices of inputs like CPC (calcined petroleum coke) and furnace oil resulted in higher operating costs.3b due to lower TcRc margins.3b had non recurring VRS expense of Rs220m pertaining to the closure of the Kalwa Foil plant.000 tons in 3QFY11.2b.6b.5b (against our estimate of Rs4.
6 Copper 1. 10 November 2010 1QFY11 5.5MW. Major approvals are in place and site activities are on schedule.000 people.Hindalco Share of aluminum in segmental EBIT (Rs b) drops led by a rise in costs Aluminium 0.4 1.5 5 . An expansion from 161ktpa to 213ktpa. evaporators and turbines has begun.2 1.5 7.2 0. Sixteen of the 28 pots are in operation and the rest will be taken in line soon. along with a 100MW power plant will be complete in 4QFY12.4 4QFY10 Source: Company/MOSL CoP of aluminum products rose 11% QoQ to US$2.2 5.7 1. expansion at Hirakud announced Utkal Alumina: A 1. Contractors are working at the site for civil and structural work and have mobilized more than 7.6 1. premium over LME remains flat Greenfield projects on track. concreting and tank erection are underway.5 7. About 83% of the project cost has been committed. Piling.3 2QFY11 4. Major orders have been placed. About 83% of the project cost has been committed. Mahan: A 359ktpa smelter along with a 900MW CPP is expected to be complete on time by the end of 2QFY12. Nearly 12.3 1.5mtpa alumina refinery is expected to be completed on time by the end of 2QFY12.1 1. fabrication.6 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 2. Further expansion at Hirakud: Hindalco plans to expand the smelting capacity at Hirakud from the proposed 213ktpa to 360ktpa with a corresponding increase in backup captive power from the proposed 467.6 3QFY10 4.3 2.6 4.100/ton.2 6. Hirakud: The smelter expansion project from 155ktpa to 161ktpa is nearing completion.000 people are working at the site. Site activities like a boundary wall and area grading are progressing well.5MW to 967.5 1. The erection of major equipment like boilers.
Novelis announced two price hikes in 3QFY11 in Europe and North America. we believe Novelis will still have a positive impact on it margins after price hikes. Although Hindalco's standalone 2QFY11 results were weaker than our expectations due to cost inflation because of coal. We are raising our target price from Rs230 to Rs260 based on 7x FY12E EV/EBITDA.000/ton to US$2. 3QFY11 remains seasonally weak in the West due to winter holidays. We have toned down our target EV/EBITDA multiple from 7. raising LME estimates. we are raising consolidated FY11 EPS by 23% to Rs18.4x FY12E. We are upgrading our FY11 EBITDA estimates for Novelis from US$910m to US$1.1b due to strong quarterly performance and continued positive traction.5. While cost inflation due to a wage hike in Korea will offset price hikes. The stock trades at an EV/EBITDA of 6.Hindalco Novelis pricing environment favorable. Consequently. Maintain Buy. 10% earnings upgrade The pricing environment is positive due to tight supply-side conditions globally.5x to 7x due to an upgrade in LME assumption and best ever performance of Novelis. pet coke and furnace oil prices.5 and FY12 EPS by 10% to Rs19. 10 November 2010 6 .9x FY11E and 6. earnings are upgraded because we have changed the LME assumption for aluminum from US$2.200 to model stronger metal prices driven by a second round of quantitative easing.
7x FY12E and EV/ EBITDA of 6.9 6. Along with a 0.6 3. Valuation and view The stock trades at a P/E of 11.7 2. ensuring low cost of production. expiry of price ceiling contracts and the return of pricing power due to changing industry dynamics. Buy Stock performance (1 year) Hindalco 240 (Rs) .9 14. ICSG expects the world copper market to post a deficit of 400kt as increased economic activity will boost demand faster than the growth of refined production. Its copper smelting capacity of 500ktpa is the largest in Asia. which supports higher LME prices. Key investment risks Unexpected fall in aluminum prices and sluggish growth in developed countries could adversely impact earnings.54mtpa smelting capacity.0 11.7 2. production curbs on certain Chinese capacities and the depreciation of the US dollar.3 2.0 13.8 Comparative valuations Target Price and Recommendation Current Target Price (Rs) Price (Rs) 228 260 Upside (%) 14.2 0.5 Consensus forecast 16.0 Reco.1 15.1 15.1 18.RHS 60 45 30 15 0 Nov-10 Shareholding Pattern (%) Sep-10 Promoter Domestic Inst Foreign Others 32.5 1. Rising energy costs are increasing costs of production of marginal players. the company is focusing on tripling its aluminum production capacity in India in the next three years through brownfield and greenfield projects.9 0.9 8.9 28.9 16.6 5. EPS: MOSL forecast v/s consensus (Rs) Hindalco P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E 12.4xFY12E. Hindalco's new smelting capacities are coming close to energy sources and alumina facilities will be set up close to bauxite mines. to Sensex (%) . Maintain Buy.1 210 180 150 120 Nov-09 Feb-10 May-10 Aug-10 10 November 2010 7 .9 6.3 2.5 1. Aluminum production is expected to post 21% CAGR and alumina 28% CAGR over FY10-14.1 3. Key investment arguments Hindalco has put domestic greenfield projects on the fast track to add 718ktpa of capacity by the end of FY12. with captive bauxite mines sourcing ~67% requirement for its 1.4 8.2 Sep-09 36.5mtpa alumina refinery.9 37.0 FY11 FY12 MOSL forecast 18.3 1. Additional quantitative easing in developed markets to maintain economic recovery will support higher metal prices in the near term.3 2.0 Variation (%) 14.2 Jun-10 32. Recent developments Hindalco's copper production at Smelter-3 in Dahej was disrupted due to the breakdown of a cooling tower at the sulfuric acid plant.4 Nalco 21.4 Sterlite 12.3 11. The repair of the cooling tower is expected to be completed in two weeks.2 19. Sector view Base metal prices have risen by 15-25% from their recent lows in August on improved demand.Hindalco Hindalco: an investment profile Company description Hindalco is the largest aluminum producer in India.0 16. it is also the largest maker of flat rolled aluminum products in India.7 39. Novelis' cash flows have started improving due to well planned restructuring.5 19.8 1. After successfully turning Novelis around in FY10.4 9.LHS Rel.
Hindalco Financials and Valuation 10 November 2010 8 .
Hindalco N O T E S 10 November 2010 9 .
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