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7/27/2019 Hindalco Industries Initiating Coverage
1/24Emkay Global Financial Services Ltd 1
December 16, 2011
Reco
AccumulateCMP
Rs 126
Target Price
Rs 154
EPS change FY12E/13E (%) NA
Target Price change (%) NA
Nifty 4,652
Sensex 15,491
Price Performance
(%) 1M 3M 6M 12M
Absolute 2 (13) (26) (44)
Rel. to Nifty 10 (5) (15) (28)
Source: Bloomberg
Relative Price Chart
100
135
170
205
240
275
Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11
Rs
-40
-28
-16
-4
8
20%
Hindalco (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Stock Details
Sector Metals & Mining
Bloomberg HNDL@IN
Equity Capital (Rs mn) 1915
Face Value(Rs) 1
No of shares o/s (mn) 1915
52 Week H/L 252/113
Market Cap (Rs bn/USD mn) 240/4,545
Daily Avg Volume (No of sh) 10449755
Daily Avg Turnover (US$mn) 25.7
Shareholding Pattern (%)
Sep-11 Jun-11 Mar-11
Promoters 32.1 32.1 32.1
FII/NRI 39.4 42.4 42.4
Institutions 14.1 12.8 13.0
Private Corp 6.3 4.9 4.9
Public 8.2 7.8 7.7
Source: Capitaline
Jagdish Agarwal
[email protected]+91 22 6612 1381
Goutam [email protected]+91 22 6612 1275
Prince Poddar
+91 22 6612 1238
Initiatin
g
Coverage
Hindalco Industries
Novelis holds the key
Novelis to remain the key growth driver with an EBITDA ofmore than US$1 bn, largely immune to LME. Successful debtrefinancing to address concerns on cons. balance sheet
First quartile unit cost of production of domestic aluminiumbusiness to ensure profitability even at tough times. Three-fold 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 businesswould help mitigating commodity risk to a large extent
Stability in Novelis with capex driven growth and attractivevaluations should outplay short- term concerns; Initiatecoverage 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.
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 bothgreenfield 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.
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 therecent global pressure on TcRc contracts.
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 Rs Mn
YE- Net EBITDA EPS EPS RoE EV/
Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV
FY10 607,221 97,458 16.0 39,276 22.2 590.7 18.2 7.3 4.0 1.3
FY11 720,779 80,017 11.1 24,564 12.8 -42.1 8.5 16.5 6.9 1.4
FY12E 779,536 83,325 10.7 29,470 15.4 19.9 9.3 8.7 5.8 0.8
FY13E 808,267 93,322 11.5 32,091 16.8 16.5 9.3 7.8 5.4 0.7
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Emkay Research 16 December 2011 2
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 thecompany 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 (kt) residual alumina sales are thus expected to decline (kt)
138 151239 223 210 195
316170 180
149 184 177 191
191
38 43
36 39 35 3469 7275
92 94 853690
2528
22 17 18 18
18
0
100
200
300
400
500
600
700
2007 2008 2009 2010 2011 2012E 2013E
Ingots Rolled Extruded Redraw Rods Foils
300260 238 241
310 339
170
0
50
100
150200
250
300
350
400
2007 2008 2009 2010 2011 2012E 2013E
Alumina
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 combinedcapacity 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 (kt) Volumes at Nifty and Mount Gordon to increase (tonnes)
109 140 146 147 145 138 142
294
328 301 333 336 320 335
0
100
200
300
400
500
2007 2008 2009 2010 2011 2012E 2013E
CC Rods Copper Cathodes
56,45058,034 58,600
60,000
2,000
1,8001,627
643
54,000
58,000
62,000
2010 2011 2012E 2013E
Nifty Mount Gordon
Source: Company, Emkay Research Source: Company, Emkay Research
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Hindalco Industries Initiating Coverage
Emkay Research 16 December 2011 3
Table: Hindalcos standalone capacities in India
(Capacity in tpa) Dahej Renukoot Muri Belgaum Hirakud Alupuram Belur Taloja Mauda Kalwa Kollur Silvassa Renusagar Total
Alumin ium Operat ion s
Alumina 700,000 450,000 350,000 1,500,000
Primary Aluminium 345,000 161,400 506,400
Conductor redraw rods 56,400 56,400
Extrusion 23,000 8,000 31,000
Rolling plant 80,000 45,000 50,000 30,000 205,000
Foils 6,000 4,000 30,000 40,000
Specialty products 138,000 138,000
Copper Operations
Copper smelter 500,000 500,000
CC Rods 142,000 142,000
Sulphuric acid 1,670,000 1,670,000
Phosphoric acid 180,000 180,000
DAP and complexes 400,000 400,000
Gold 15 15
Silver 150 150
Power Operations
Power (MW) 367 742 1,109
Source: Company, Emkay Research
Low cost of production due to strong backward integration
The average global cost of aluminium production has been on the rise with it touching
US$2,050/ tonne in mid- 2011. The 90th
percentile cost remains at US$2,450/ tonne,
indicating ~21% rise in less than one year period. This has been due to commodity price
inflation across all categories viz. energy, coal and alumina.
Global cost curve is on the rise (US$/tonne)
1,018
1,328
1,650
2,050
1,288
1,693
2,031
2,450
0
500
1000
1500
2000
2500
2001 2005 2010 Mid-2011
Average 90th Percentile
Source: Company, Emkay Research, Industry Reports
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 hassupport from captive alumina, coal sourcing through linkages and e-auction from Coal India
slightly elevates the operational costs.
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Hindalco Industries Initiating Coverage
Emkay Research 16 December 2011 4
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 Project Type ProductNew Capacity
(ktpa)Total Cost
(Rs bn)Debt
(Rs bn)Drawdown
(Rs bn)Expected
Completion
Hirakud Brownfield Aluminium 51.6 - - - Q4FY12
Mahan Greenfield Aluminium 359.0 105.0 77.8 60.0 Q4FY12
Utkal Greenfield Alumina 1,500.0 72.0 49.1 40.0 Q4FY13
Aditya Greenfield Aluminium 359.0 105.0 NA NA Q1FY14
Aditya Greenfield Alumina 1,500.0 60.0 NA NA CY2014
Jharkhand Greenfield Aluminium 359.0 105.0 NA NA CY2015
Source: Company, Emkay Research
Threefold increase in primary aluminium capacity (ktpa) and also in Alumina (ktpa)
506
1,635
359
359
359
52
0
300
600
900
1,200
1,500
1,800
Present Hirakud Mahan Aditya Jharkhand Total
1,500
4,5001,500
1,500
0
1,500
3,000
4,500
Present Utkal Aditya 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.
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Emkay Research 16 December 2011 5
Power capacity expansion plan (MW)
1,019
3,819
249
429
100
900
900
90090
90
0
900
1,800
2,700
3,600
4,500
Present
HirakudAl
MahanAl
Utkal
Alumina
AdityaAl
Aditya
Alumina
Jharkhand
Al T
otal
Pow er Cap (MW) Cogen Cap (MW) Power Cap. Add (MW) 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 (No. of pots)
40
360
40
140
140
0
50
100
150
200
250
300
350
400
Dec '11 - Apr '12 Apr '12 - Jul '12 Sep '12 - Dec '12 Dec '12 - Jan '13 Jan '13
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 is expected to fall by 2013 on lack of capacity additions
Foils5%
Rolled Products55%
Redraw Rods29%
ExtrudedProducts
11%
Value addedProducts
61%
PrimaryAluminium
39%
Foils5%
Rolled Products57%
ExtrudedProducts
11%
Value addedProducts
53%
PrimaryAluminium
47%Redraw Rods
27%
Source: Company, Emkay Research
Rolled products which contribute more than 50% of the total volume of value-addedproducts, attract a premium of ~US$700/tonne
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Premiums on value-added products to remain stable
19752318 2350 2350
543 640808 689 737 700 700766 985
1093 1062 105010501046
169 166 120 178 137 135 135
2481
2395
2597
2238
2665 2625
18712257 22502275
0
5001000
1500
2000
2500
3000
2007 2008 2009 2010 2011 2012E 2013E
1000
1500
2000
2500
3000
Rolled Extruded Redraw Rods Foils LME (RHS)
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 value-
added 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 (kt)
19.0
49.844.1
47.1
22.0
36.0
34.2 43.8 35.0
37.0
0
20
40
60
80
100
Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12
Standard Specials
Source: Company, Emkay Research
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 Cathode50%
CC Rods37%
DAP &Complexes
30%Others13%
Gold 56%
SulphuricAcid 10%
Silver
4%
Source: Company, Emkay Research
Even with volatile LMEs, the
premiums on value-added
products to remain stable, largely
protecting margins
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Emkay Research 16 December 2011 7
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 flat-
rolled 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%Transportation
7%
Industrial
10%
Foil and
packaging
15%
Beverage Cans
54%
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
793 789 772 796 825 808
659 651 691724 683
756 779 751 800 797 765767
0
200
400
600
800
1000
Q
1FY08
Q
2FY08
Q
3FY08
Q
4FY08
Q
1FY09
Q
2FY09
Q
3FY09
Q
4FY09
Q
1FY10
Q
2FY10
Q
3FY10
Q
4FY10
Q
1FY11
Q
2FY11
Q
3FY11
Q
4FY11
Q
1FY12
Q
2FY12
Novelis Shipments (kt)
Source: Company, Emkay Research
Strong value added product
portfolio in aluminium segment
and stable contribution from
copper by- products to help
mitigate LME volatility to a large
extent
After expiry of legacy contracts,
Novelis continues to deliver
superior performance in terms of
steady volumes and stronger
EBITDA/ tonne
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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$418 in Q2FY12. We
believe Novelis would continue to deliver good performance as it is largely immune to the
LME volatility and also, due to exposure to the value added segment. Novelis currently
contributes two- thirds of consolidated revenue.
the EBITDA and EBITDA/tonne have been improving
128
229152
189
260
88 112 57
124 200 199231
263 290 242280 306 301
95
418399363338
393353323307289
191177116
335
250208
307
170
050
100150200250300350400
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
-50
50
150
250
350
450
Adj. EBITDA (US$ mn) Adj. EBITDA/tonne (US$)
Source: Company, Emkay Research
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 volumegrowth
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
Novelis has been meeting
EBITDA guidance for past few
quarters and recently it had
revised its EBITDA guidance for
FY12 at US$1.1- 1.15 bn
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Capacity expansion plan of Novelis
Through debottlenecking
Expenditure (US$ mn)Region Additional capacity (KTPA)
FY12 Total
North America 60
South America 30
Europe 90Asia 70
80 80
New capacity addit ion
Expenditure (US$ mn)Region Additional capacity (KTPA)
FY12 Total
North America 200 80 200
Pinda, Brazil, SA 220 180 300
Korea, Asia 350 85 400
Total 345 900
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$700 mn has been paid as dividend to
Hindalco. Other than easing of pressure from the standalone balance sheet, the refinancing
(on conducive terms) also helped cash fungibility between Hindalco and Novelis and helped
avoid financial risk. With a sizable expansion plan in the domestic business, we believe this
would help the company maintain the desired liquidity.
Table: Hindalco and Novelis debt repayment schedule
Mar-11 Repayments in
Hindalco Rs bn FY12 FY13 FY14 FY15 FY16 Post FY16
Rupee-term loan 51.43 21.47 25.72 4.25
Short-term loan 21.29
Standalone Hindalco 72.72 0 0 21.47 25.72 4.25 0
FC Loan at AV Minerals
(Guaranteed by Hindalco) Prepaid
Recourse Hindalco 72.72 0 0 21.47 25.72 4.25 0
Mar-11 Repayments inNovelis
US$ bn FY12 FY13 FY14 FY15 FY16 Post FY16
ABL (Total Limit US$ 800 mn) 0.017
Senior Notes 2.576 0.076 2.500
Bank Loan 1.458 0.015 0.015 0.015 0.015 0.015 1.383
Others 0.052
Total 4.103 0.015 0.015 0.015 0.091 0.015 3.883
Source: Company
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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)
Novelis topline line to grow at ~4% CAGR during FY11-13E(US$ mn)
195
239 249265
182192183
0
50
100
150
200
250
300
2007 2008 2009 2010 2011 2012E 2013E
5.4% CAGR (FY11-13E)
1124610177
8673
10577 1099111370
0
2000
4000
6000
8000
10000
12000
2008 2009 2010 2011 2012E 2013E
3.7% CAGR (FY11-13E)
Source: Company, Emkay Research Source: Company, Emkay Research
Consolidated sales to grow at ~5.9% CAGR during FY11- 13E (Rs. bn)
193
600660
607
721 780 808
0
100
200
300
400
500
600700
800
900
2007 2008 2009 2010 2011 2012E 2013E
5.9% CAGR (FY11-13E)
Source: Company, Emkay Research
Assumptions for FY12E and FY13E
Parameters FY12E FY13ESales volume (tonne)
Aluminium Total 522,754 650,960
Copper Total 320,000 335,000
Alumina 338,820 169,661
Novelis Shipments (kt) 3,042 3,115
Realization (Rs/ tonne)
Aluminium ingots 114,000 111,625
Copper cathode 386,400 382,375
Novelis (US$ / tonne) 3,605 3,650
LME (US$/ tonne)
Aluminium 2,275 2,250Copper 8,000 8,000
Exchange rate (USD/INR) 48.0 47.5
Source: Company, Emkay Research
As per Bloomberg the median
forecast for Aluminium LME for
CY12 and CY13 remain US$2325
and US$2475 respectively
The same for copper stand at
US$8706 and US$8525
respectively for CY12 and CY13
Higher growth rate in consolidated
topline is primarily due to
depreciation in INR
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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 its contribution to earnings is comparatively lower
73 71 76 70 80
110 121 106 125159
0
50
100
150
200
250
300
2007 2008 2009 2010 2011
Aluminium Copper
(Rs bn)
2924 22
18 20
5
54
76
0
5
10
15
20
25
30
35
40
2007 2008 2009 2010 2011
Aluminium Copper
(Rs bn)
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 Novelis EBITDA to see improvement with better margins
2932 33
3640
3430
13.7%13.3%13.4%15.1%
16.7%17.7%
21.9%
0
10
20
30
40
50
2007 2008 2009 2010 2011 2012E 2013E
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
EBITDA (Rs bn) EBITDA Margin (%)
533 566
1085935 1020
11685%
6%
13%
9%
10%9%
0
200
400
600
800
1000
1200
1400
2008 2009 2010 2011 2012E 2013E
0%
2%
4%
6%
8%
10%
12%
14%
EBITDA (US$ mn) EBITDA Margin (%)
Source: Company, Emkay Research Source: Company, Emkay Research
Consolidated EBITDA to grow modestly, margins likely to improve
44
66
30
97
80 8393
11.1%
22.9%
4.5%
16.0%
11.1% 10.7% 11.5%
0
20
40
60
80
100
120
2007 2008 2009 2010 2011 2012E 2013E
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
EBITDA (Rs bn) EBITDA Margin (%)
Source: Company, Emkay Research
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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 Novelis is likely to see strong bottomline growth
22
2926
23
19
21 22
14.0% 14.9%
12.2%
9.8%9.0% 8.9% 8.6%
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012E 2013E
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
PAT (Rs bn) PAT Margin (%)
116-1910-117
405 245 348
5% 1%2% 3%
-19%
-1%
-2500
-2000
-1500
-1000
-500
0
500
1000
2008 2009 2010 2011 2012E 2013E
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
PAT (US$ mn) PAT Margin (%)
Source: Company, Emkay Research Source: Company, Emkay Research
Consolidated PAT to grow at a faster pace
2724
5
39
2529
32
4.0%3.8%
3.4%
6.5%
0.7%
13.9%
4.0%
0
10
20
30
40
50
2007 2008 2009 2010 2011 2012E 2013E
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
PAT (Rs bn) PAT Margin (%)
Source: Company, Emkay Research
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 returnratios might not be a true reflection of the companys operational efficiency.
Standalone returns to remain low but consolidated returns to improve gradually
20.7
16.4
16.6
10.4
7.16.4 6.5 5.8 5.6
9.4
6.9 7.2 7.0 6.8
0.0
5.0
10.0
15.0
20.0
25.0
2007 2008 2009 2010 2011 2012E 2013E
RoCE RoE
21.0
13.915.7
7.4
-0.1
13.6
8.4 7.0 7.23.1
18.2
8.59.3 9.3
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
2007 2008 2009 2010 2011 2012E 2013E
RoCE RoE
Source: Company, Emkay Research Source: Company, Emkay Research
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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 It has been trading between 2x-9x 1yr. forward EV/EBITDA
0
100
200
300
400
500
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
(InRs)
Price 18x 14x 10x 6x 2x
0
200000
400000
600000
800000
1000000
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(Rsmn)
EV 9x 7x 5x 2x
Source: Company, Emkay Research 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).
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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/EBITDArespectively, 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) Multiple EV (Rs mn)
Standalone business 36,221 5.5 199,213
Novelis 51,721 6 310,323
ABML (51%) 4,174 5 10,645
Total EV 520,181
Net debt 254,058
Market cap 266,123
Per share value 139
Value of investment (20% discount) 15
Fair value (Rs/ share) 154
Global peers Aluminium and Copper producers
PE P/BV EV/EBITDA ROECompany
Market cap(USD mn) CY12E CY13E CY12E CY13E CY12E CY13E CY12E CY13E
Aluminium
Alcoa Inc 9,621 11.10 9.48 0.68 0.63 6.12 5.71 6.11 6.70
Chalco 12,621 29.82 27.96 0.72 0.69 13.11 12.58 2.95 3.89
Norsk Hydro 9,242 12.76 12.38 0.65 0.63 4.30 5.20 9.82 5.45
BHP Billiton 177,588 8.44 7.97 2.65 2.11 4.45 4.20 35.14 29.55
Average 15.53 14.45 1.18 1.02 7.00 6.92 13.51 11.40
Copper
Freeport-Mcmoran 35,812 7.61 7.88 2.32 1.94 3.57 3.61 31.67 25.10
Jiangxi Copper 10,641 6.50 6.48 1.21 1.08 6.87 6.81 19.37 17.85
Xstrata Plc 43,845 7.21 6.40 0.95 0.84 4.53 4.13 13.85 14.70
Grupo Mexico 20,990 9.05 8.43 2.98 2.50 4.55 4.24 35.98 33.10
Aurubis Ag 2,316 7.70 8.84 1.02 0.95 4.42 4.50 14.73 10.77
Average 7.61 7.61 1.70 1.46 4.79 4.66 23.12 20.30
Source: Bloomberg, Emkay Research
Domestic peers Non-ferrous players
PE P/BV EV/ EBITDA ROECompany
Market cap(INR mn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E
Sterlite Ind. 334,053 5.73 5.06 0.70 0.62 4.33 3.72 13.14 13.54
HZL 517,813 9.18 8.17 1.88 1.57 5.83 5.15 21.98 20.51
NALCO 132,212 8.62 9.41 - - 3.86 4.20 - -
Ess Dee Al. 4,326 3.55 2.90 0.52 0.44 3.42 2.79 15.15 15.87
Average 6.77 6.39 1.03 0.88 4.36 3.97 16.76 16.64
Source: BSE, Bloomberg, Emkay Estimates; Bloomberg Consensus.
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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.
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 aswell 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 ofINR against US Dollar) would reduce the realization of these metals in INR terms and would
hence impact profitability for the company.
While Hindalcos performance has
been stable, the delays in
upcoming projects have resulted
in cost overruns and margin
pressures
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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 toeconomic 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$2,250/tonne respectively.
Aluminium prices and LME warehouse stock
0500
1000150020002500
30003500
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
(In$/tonne)
0
1000000
2000000
3000000
4000000
5000000
6000000
(Intonne)
Al-LME Inventory (R.H.S) Al-LME (L.H.S)
Source: Bloomberg, Emkay Research
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-on-
board 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.
While FY12 Aluminium prices
began with a strong note, they
have corrected sharply the year
so far
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Geography wise production and consumption of Aluminium
CAGR
CY06 CY07 CY08 CY09 CY10 CY11E CY12E 2006-12E 2006-10 2010-12E
Aluminium Production (kt)
Africa 1,864 1,815 1,715 1,681 1,824 1,935 2,052 1.6% -0.5% 6.1%
North America 5,332 5,545 5,783 4,850 4,690 4,966 5,345 0.0% -3.2% 6.8%
Latin America 2,493 2,557 2,660 2,508 2,494 2,368 2,548 0.4% 0.0% 1.1%
Asia (ex. China) 3,296 3,504 3,700 4,321 5,089 5,929 6,379 11.6% 11.5% 12.0%
Western Europe 4,541 4,664 4,840 3,964 4,089 4,103 4,369 -0.6% -2.6% 3.4%
Australasia 2,274 2,314 2,296 2,211 2,277 2,228 2,273 0.0% 0.0% -0.1%
China 9,349 12,607 13,076 13,550 16,404 17,821 18,240 11.8% 15.1% 5.4%
CIS and Eastern Europe 4,735 5,001 5,269 4,745 4,798 5,028 5,309 1.9% 0.3% 5.2%
Total 33,884 38,007 39,339 37,830 41,665 44,378 46,515 5.4% 5.3% 5.7%
Aluminium Consumption
North America 7,653 7,526 6,913 5,043 5,547 5,769 5,890 -4.3% -7.7% 3.0%
Asia (ex. China) 6,960 7,100 7,140 6,675 7,200 7,495 7,735 1.8% 0.9% 3.6%
Western Europe 7,055 7,244 7,256 5,900 6,786 7,023 7,164 0.3% -1.0% 2.7%
China 8,480 11,497 12,934 14,100 16,814 18,681 20,549 15.9% 18.7% 10.6%
Others 4,098 4,187 4,288 4,163 4,330 4,602 4,790 2.6% 1.4% 5.2%
Total 34,246 37,554 38,531 35,881 40,677 43,570 46,128 5.1% 4.4% 6.5%
Implied surplus (deficit) -362 453 807 1,949 988 808 387
Source: Industry, Emkay Research
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$7,586/ tonne.
The production (mine as well as refined) and consumption growth figures for copper standat 3.9% and 4.3% respectively.
Copper prices and LME warehouse stock
0150030004500600075009000
1050012000
Sep-07
Jan-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Mar-10
Jul-10
Nov-10
Mar-11
Aug-11
Dec-11
(US$/tonne)
0
100000
200000
300000
400000
500000
600000
(tonne)
Copper-LME Inventory (R.H.S) Copper-LME (L.H.S)
Source: Bloomberg, Emkay Research
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.
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Geography wise production and consumption of copper
CAGR
CY06 CY07 CY08 CY09 CY10 CY11E CY12E 2006-12E 2006-10 2010-12E
Copper Mine production (kt)
Total 14,990 15,483 15,546 15,950 16,097 16,443 17,383 2.5% 1.8% 3.9%
Year-on-year % change 0.50% 3.30% 0.40% 2.60% 0.90% 2.10% 5.70%
Copper Refined production (kt)
Africa 563 627 680 770 922 1,020 1,200 13.4% 13.1% 14.1%
North America 2,155 2,175 2,210 2,060 2,080 2,110 2,135 -0.2% -0.9% 1.3%
Latin America 3,553 3,595 3,535 3,600 3,660 3,725 3,818 1.2% 0.7% 2.1%
Asia (ex. China) 4,200 4,330 4,340 4,030 4,100 4,160 4,210 0.0% -0.6% 1.3%
China 3,047 3,497 3,779 4,252 4,800 5,184 5,547 10.5% 12.0% 7.5%
Australasia 429 442 502 446 430 455 480 1.9% 0.1% 5.7%
Europe 3,605 3,620 3,710 3,560 3,610 3,660 3,760 0.7% 0.0% 2.1%
Total 17,552 18,286 18,756 18,718 19,602 20,314 21,150 3.2% 2.8% 3.9%
Copper Refined consumption (kt)
North America 2,863 2,805 2,720 2,610 2,690 2,750 2,778 -0.5% -1.5% 1.6%
Latin America 554 568 580 560 580 610 640 2.4% 1.2% 5.0%
Asia (ex. China) 4,680 4,900 4,860 4,500 4,950 5,198 5,405 2.4% 1.4% 4.5%
China 3,820 4,525 4,930 5,670 6,294 6,703 7,239 11.2% 13.3% 7.2%
Europe 5,208 5,155 5,050 4,545 4,795 4,891 4,964 -0.8% -2.0% 1.7%
Others 343 350 352 340 351 362 366 1.1% 0.6% 2.1%
Total 17,468 18,303 18,492 18,225 19,660 20,513 21,392 3.4% 3.0% 4.3%
Implied surplus (deficit) 84 -17 264 493 -58 -199 -242
Source: Industry, Emkay research
Top aluminium producing companies in the world (2010) Top copper producing companies in the world (2010)
4,0833,790
3,444
2,940
1,5051,242 1,170 957 864 862
0
1,000
2,000
3,000
4,000
5,000
Rusal
RioTinto
Alcoa
Al.China
Norsk
BHP
DubaiAl.
ChinaPo.
Al.Bah
Shandong
Aluminium Production 2010 (kt)
550550578587615753901
1,0131,132
1,864
0
500
1,000
1,500
2,000
Codelco
Aurubis
Freeport
Jiangxi
Xstrata
Nippon
Glencore
BHP
Sumitomo
Grupo
Mexico
Refined Copper Production 2010 (kt)
Source: Bloomberg, Emkay Research Source: Bloomberg, Emkay Research
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Annexure I
Aluminium manufacturing process
Mining of Bauxite ore, ~2 tonnes of
bauxite to give 1 tonne of alumina
Bauxite ore is
r e f i n e d i n t o
alumina
2 tonnes of alumina
required to produce
1 tonne of aluminium
~15,000 units of power
required to produce
1 tonne of aluminium
Alumina is reduced to aluminium
by the process of electrolytic
reduction
Aluminium is mixed with various
alloys depending on product to be
made
Aluminium is shipped - cut, bent,
shaped into various products
Alumi nium items junked or
scrapped are melted down for
reuse
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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 expansionthrough 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
(FY11Shipments -
1,121 kt)
Asia
(FY11shipments -
581 kt)
South
America
(FY11shipments -
419 kt)
100%Holding - 11FRP Plants
Europe
(FY11shipments -
976 kt)
40% Affiliate -Logan,
Kentucky
100%Holding - 13FRP Plants
50% JV -Norf,
Germany
59%Subsidiary -Bukit Raja,Malaysia
68%Subsidiary,
Ulsan, Korea
68%Subsidiary,Yeongju,
Korea
100%Holding - 2FRP 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
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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 accountof 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 balancesheet. 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
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Hirakud FRP project Transfer from Novelis plant to Hirakud
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 capexfor 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 alreadybeen 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 Balance Sheet
Y/E, Mar (Rs. mn) FY10 FY11 FY12E FY13E Y/E, Mar (Rs. mn) FY10 FY11 FY12E FY13E
Net Sales 607,221 720,779 779,536 808,267 Equity share capital 1984 1990 1990 1990
Growth (%) -7.9 18.7 8.2 3.7 Reserves & surplus 213,462 288,243 314,367 343,112
Expenditure 509,763 640,762 696,211 714,945 Net worth 215,446 290,233 316,357 345,102
Raw Materials 381,004 474,163 493,215 506,018 Minority Interest 17371.80 22169.40 22169.40 22169.40
Employee Cost 50,650 55,933 63,923 65,281 Secured Loans 107,627 137,358 227,358 267,358
Other Exp 78109 110666 139074 143646 Unsecured Loans 132,360 139,562 139,562 139,562
EBITDA 97,458 80,017 83,325 93,322 Loan Funds 239,987 276,920 366,920 406,920
Growth (%) 228.2 -17.9 4.1 12.0 Net deferred tax lia 39382.00 37595.90 37595.90 37595.90
EBITDA marg in (%) 16.0 11.1 10.7 11.5 Total Liabilities 512,187 626,918 743,042 811,787
Depreciation 27815.0 27500.1 31208.1 35201.3 Gross Block 456,221 482,068 547,068 617,068
EBIT 69,643 52,517 52,116 58,120 Less: Depreciation 166,216 158,014 189,223 224,424
EBIT marg in (%) 11.5 7.3 6.7 7.2 Net block 290,005 324,053 357,845 392,644
Other Income 3227.1 4308.5 6000.0 6000.0 CWIP 58008.00 131307.70 191307.70 211307.70
Interest expenses 11041.4 18393.4 16144.5 17904.5 Investment 112,455 108,549 118,549 128,549
PBT 61,829 38,432 41,972 46,216 Current Assets 231,884 279,848 296,833 306,890
Tax 18289 9638 10493 11554 Inventories 112,754 140,956 149,500 155,010
Effective tax rate (%) 29.6 25.1 25.0 25.0 Sundry debtors 65,437 79,996 85,429 88,577
Adjusted PAT 43,540 28,794 31,479 34,662 Cash & bank balance 21,954 25,563 24,253 24,313
(Profit)/loss from JV's/Ass/MI -4263.8 -4229.8 -2009.2 -2570.7 Loans & advances 31,171 31,989 36,307 37,645
Adjusted PAT after MI 39,276 24,564 29,470 32,091 Other current assets 569 1,345 1,345 1,345
Growth (%) 698.1 -37.5 20.0 8.9 Current lia & Prov 180,166 216,840 221,493 227,603
Net Marg in (%) 6.5 3.4 3.8 4.0 Current liabilities 130,996 164,692 179,654 184,704
E/O items -21.00 0.00 0.00 0.00 Provisions 49,170 52,149 41,839 42,900
Reported PAT 39,255 24,564 29,470 32,091 Net current assets 51,718 63,008 75,340 79,287
Growth (%) 711.2 -37.4 20.0 8.9 Total Assets 512,187 626,918 743,042 811,787
Cash Flow Key Ratios
Y/E, Mar (Rs. mn) FY10 FY11 FY12E FY13E Y/E, Mar FY10 FY11 FY12E FY13E
PBT (Ex-Other income) 61,808 38,432 41,972 46,216 Profitability (%)
Depreciation 27,815 27,500 31,208 35,201 EBITDA Margin 16.0 11.1 10.7 11.5
Interest Provided 11,041 18,393 16,144 17,904 Net Margin 6.5 3.4 3.8 4.0
Other Non-Cash items -38,891 -1,900 -2,009 -2,571 ROCE 13.6 8.4 7.0 7.2
Chg in working cap -5,984 -7,031 -13,643 -3,886 ROE 18.2 8.5 9.3 9.3
Tax paid -6,353 -13,131 -10,493 -11,554 RoIC 7.7 3.9 4.0 4.0
Operating Cashflow 49,437 62,263 63,179 81,311 Per Share Data (Rs)
Capital expenditure -22,539 -99,146 -125,000 -90,000 EPS 22.2 12.8 15.4 16.8Free Cash Flow 26,897 -36,883 -61,821 -8,689 CEPS 35.0 27.2 31.7 35.1
Other income 3,227 4,309 6,000 6,000 BVPS 121.6 151.6 165.3 180.3
Investments -16,143 5,074 -10,000 -10,000 DPS 1.5 1.5 1.5 1.5
Investing Cashflow -54,484 -67,104 -135,000 -100,000 Valuations (x)
Equity Capital Raised 27,543 99 0 0 PER 7.3 16.5 8.7 7.8
Loans Taken / (Repaid) -3,209 37,384 90,000 40,000 P/CEPS 4.6 7.8 4.2 3.7
Interest Paid -16,771 -25,410 -16,144 -17,904 P/BV 1.3 1.4 0.8 0.7
Dividend Paid & Others -3,274 -3,838 -3,346 -3,346 EV / Sales 0.6 0.8 0.6 0.6
Financing Cashflow 4,284 8,253 70,510 18,750 EV/ EBITDA 4 6.9 5.8 5.4
Net chg in cash -764 3,413 -1,311 61 Gearing Ratio (x)
Opening cash position 21,820 21,858 25,467 24,157 Net Debt/ Equity 0.5 0.5 0.7 0.7Closing cash position 21,858 25,467 24,157 24,217 Net Debt/EBIDTA 1.1 1.8 2.7 2.7
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