hndl-20101110-mosl-ru-pg010 (1)
TRANSCRIPT
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BuyPrevious Recommendation: Buy Rs228
10 November 2010
2QFY11 Results Update
SECTOR: METALS
HindalcoBLOOMBERG
HNDL IN
REUTERS CODE
HALC.BO
STOCK INFO.
BSE Sensex: 20,876
S&P CNX: 6,276
Consolidated
Sanjay Jain ([email protected]);Tel:+912239825412/Tushar Chaudhari ([email protected]); +9122 39825425
Equity Shares (m) 1,984.4
52-Week Range (Rs) 239/125
1,6,12 Rel. Perf . (%) 3/13/53
M.Cap. (Rs b) 452.4
M.Cap. (US$ b) 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 itsKorean 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 upgradingour 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.
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Novelis posts best ever results; EBITDA per ton US$378; adjusted EBITDAUS$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). Segmental income
increased sequentially across North America, Europe and Asia, but declined in SouthAmerica.
Total shipments increased 6% YoY to 767,000 tons. Shipments were 2% lower QoQ
due to lower shipments in Asia because of a 12-day strike at its Korean plant. This is
expected to be made up in 2HFY11. FRP volumes increased 6.3% YoY and declined
1.2% QoQ to 737k tons. Volumes in North America and Europe increased 10-12%
YoY due to higher demand particularly from the automobile sector.
EBITDA per ton continued to increase for the sixth consecutive quarter to US$378/
ton due to continued strong demand, product portfolio optimization and tight control
over costs.
Novelis posts strong growth in operating cash flow (US$ m)
and in adjusted EBITDA (US$ m)
Source: Company/MOSL
Novelis has announced closure of Bridgnorth plant. This will allow incremental
production of higher margin products within European operations and cost savings of
about US$15m.
-400
-200
0
200
400
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
131
229
152
183
218
88
127
53
124
200 199
231
263290
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
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Hindalco
310 November 2010
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. FRP demand is
expected to post 6% CAGR to reach 22mt over 2010-15.
Novelis has planned a 20% increase in capacity over FY11-14 through de-bottlenecking
and new capacity addition at Pinda in Brazil. The 220ktpa Pinda project is expected to
be completed by 3QCY12.
De-bottlenecking projects across its facilities worldwide will expand production capacity
by ~300k tons a year at marginal capex of US$80m, leading to improved RoCE.
Net debt came down by US$97m QoQ to US$2.1b after incurring Capex of US$37m
and working capital increase of US$83m. Total cash and cash equivalents increased
by US$93m QoQ to US$512m at end 2QFY11. Novelis is deploying cash generated
from strong operating performance in reducing high cost working capital financing.
Capex during 1HFY11 was US$71m vs FY11 target of US$250m as Novelis deferredsome of the shutdowns for de-bottlenecking to meet strong demand from its customers.
Novelis expects to meet the Capex target as most of the capex will be back ended.
EBITDA per ton improves, shipments stabilize
Segmental income improves (US$ m)
268
12
240
61
166
273 291306 338
378
767779756
683724
691643658
806825
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
EBITDA/ton (US$) Shipments (ktpa)
-50
0
50
100
150
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
North America Europe Asia South America
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Hindalco standalone results highlights
Hindalco's standalone 2QFY11 adjusted PAT increased 28% YoY to Rs4.6b against
our estimate of Rs5.2b. Reported PAT of Rs4.3b had non recurring VRS expense of
Rs220m pertaining to the closure of the Kalwa Foil plant.
Net sales rose 19% YoY to Rs58.6b. Aluminum production declined 12% YoY to 123k
tons (better than our estimate of 118k tons) due to power outage at the Hirakud
smelter. The smelter is expected to be fully normalized by early 4QFY11.
Copper production increased 5% YoY to 94k tons. A breakdown of a cooling tower at
sulfuric acid plant number 3 in November 2010 will result in production loss of 8,000
tons in 3QFY11.
Segmental EBIT of the aluminum segment rose 72% YoY to Rs4.5b (against our
estimate of Rs4.9b) due to 14% higher average LME, though the appreciation of the
rupee against the US dollar eroded nearly 4% gains. 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. Reported EBIT of Rs4.24b had
non-recurring VRS expense of Rs220m.
Segmental EBIT of copper declined 41% YoY (flat QoQ) to Rs1.3b due to lower
TcRc margins.
Interest costs were lower by 21% YoY at Rs526m due to lower interest and finance
charges.
Share of aluminum in segmental revenue (Rs b) falls due to lower volumes
Source: Company/MOSL
19
21 2
0
16
14
17 1
920
19
19
27
36 2
1
22
25
33 3
434
33
40
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
Aluminium Copper
Incremental capacity through Pinda expansion and de-bottlenecking
Source: Company/MOSL
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Hindalco
510 November 2010
Source: Company/MOSL
CoP of aluminum products rose 11% QoQ to US$2,100/ton; premium over LME remains flat
Share of aluminum in segmental EBIT (Rs b) drops led by a rise in costs
Greenfield projects on track; expansion at Hirakud announced
Utkal Alumina: A 1.5mtpa alumina refinery is expected to be completed on time by
the end of 2QFY12. About 83% of the project cost has been committed. Contractors
are working at the site for civil and structural work and have mobilized more than
7,000 people. Piling, fabrication, concreting and tank erection are underway. The
erection of major equipment like boilers, evaporators and turbines has begun.
Mahan: A 359ktpa smelter along with a 900MW CPP is expected to be complete on
time by the end of 2QFY12. About 83% of the project cost has been committed.
Major approvals are in place and site activities are on schedule. Nearly 12,000 people
are working at the site.
Hirakud: The smelter expansion project from 155ktpa to 161ktpa is nearing completion.
Sixteen of the 28 pots are in operation and the rest will be taken in line soon. An
expansion from 161ktpa to 213ktpa, along with a 100MW power plant will be complete
in 4QFY12. Site activities like a boundary wall and area grading are progressing well.
Major orders have been placed. Further expansion at Hirakud: Hindalco plans to expand the smelting capacity at
Hirakud from the proposed 213ktpa to 360ktpa with a corresponding increase in back-
up captive power from the proposed 467.5MW to 967.5MW.
7.5
7.2
5.3
1.6
4.6
2.6
4.4 6
.15.5
4.5
0.7
1.4
1.2
0.5
2.2
1.6 1
.31.2
1.3
1.6
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
Aluminium Copper
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Hindalco
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Novelis pricing environment favorable; raising LME estimates; 10%earnings upgrade
The pricing environment is positive due to tight supply-side conditions globally. Novelis
announced two price hikes in 3QFY11 in Europe and North America. While cost
inflation due to a wage hike in Korea will offset price hikes, we believe Novelis willstill have a positive impact on it margins after price hikes. 3QFY11 remains seasonally
weak in the West due to winter holidays.
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. Although Hindalco's
standalone 2QFY11 results were weaker than our expectations due to cost inflation
because of coal, pet coke and furnace oil prices, earnings are upgraded because we
have changed the LME assumption for aluminum from US$2,000/ton to US$2,200 to
model stronger metal prices driven by a second round of quantitative easing.
Consequently, we are raising 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 assumption and best ever performance of Novelis. Maintain Buy.
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Hindalco
710 November 2010
Shareholding Pattern (%)
Sep-10 Jun-10 Sep-09
Promoter 32.1 32.1 36.1
Domestic Inst 15.7 15.9 18.9
Foreign 39.0 37.9 28.9
Others 13.2 14.2 16.1
Stock performance (1 year)
Comparative valuations
Hindalco Nalco Sterlite
P/E (x) FY11E 12.3 21.0 12.9
FY12E 11.7 16.3 8.5
P/BV (x) FY11E 2.7 2.3 1.5
FY12E 2.2 2.1 1.3
EV/Sales (x) FY11E 0.9 3.6 1.8
FY12E 0.9 3.0 1.4
EV/EBITDA (x) FY11E 6.9 11.4 9.6
FY12E 6.4 8.4 5.0
EPS: MOSL forecast v/s consensus (Rs)
MOSL Consensus Variation
forecast forecast (%)
FY11 18.5 16.2 14.3
FY12 19.5 19.0 2.8
Target Price and Recommendation
Current Target Upside Reco.
Price (Rs) Price (Rs) (%)
228 260 14.0 Buy
Company description
Hindalco is the largest aluminum producer in India, with
captive bauxite mines sourcing ~67% requirement for its1.5mtpa alumina refinery. Along with a 0.54mtpa smelting
capacity, it is also the largest maker of flat rolled aluminum
products in India. After successfully turning Novelis around
in FY10, the company is focusing on tripling its aluminum
production capacity in India in the next three years through
brownfield and greenfield projects. Its copper smelting
capacity of 500ktpa is the largest in Asia.
Key investment arguments
Hindalco has put domestic greenfield projects on the
fast track to add 718ktpa of capacity by the end of
FY12. Aluminum production is expected to post 21%
CAGR and alumina 28% CAGR over FY10-14.
Hindalco's new smelting capacities are coming close
to energy sources and alumina facilities will be set up
close to bauxite mines, ensuring low cost of production.
Novelis' cash flows have started improving due to well
planned restructuring, expiry of price ceiling contracts
and the return of pricing power due to changing industry
dynamics.
Key investment risks
Unexpected fall in aluminum prices and sluggish growth
in developed countries could adversely impact earnings.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. The repair of the cooling tower
is expected to be completed in two weeks.
Valuation and view
The stock trades at a P/E of 11.7x FY12E and EV/
EBITDA of 6.4xFY12E. Maintain Buy.
Sector view
Base metal prices have risen by 15-25% from their
recent lows in August on improved demand, production
curbs on certain Chinese capacities and the depreciation
of the US dollar. Rising energy costs are increasing
costs of production of marginal players, which supports
higher LME prices. 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. Additional quantitative easing in
developed markets to maintain economic recovery will
support higher metal prices in the near term.
Hindalco: an investment profile
120
150
180
210
240
Nov-09 Feb-10 May-10 Aug-10 Nov-10
0
15
30
45
60
Hindalco (Rs) - LHS Rel. to Sensex (%) - RHS
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810 November 2010
Financials and Valuation
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Hindalco
910 November 2010
N O T E S
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1010 November 2010
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Disclosure of Interest Statement Hindalco
1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No
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