>HINDALCO INDUSTRIES: Novelis holds the key; India’s leading aluminium & copper producer

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
Hindalco’s 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.


Focus on value added products to help mitigate volatility
Value added products constitute about half of Hindalco’s 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.


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.



India’s 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.



It is also a leading copper producer
Hindalco’s 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. Hindalco’s 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.

To read the full report: HINDALCO INDSUTRIES
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