Capex will peak in FY13; valuations factor most negatives; 70%
cash flows insulated from LME; BUY
We met the management of Hindalco (HNDL IN, Mkt Cap USD4.4b, CMP118, BUY) to
get a detailed update on the projects pipeline. Key takaways:
- Hindalco remains focused on execution of key projects with planned
expenditure of INR90b on Indian projects (despite low IRR at current LME) and
another USD600-700m capex at Novelis in FY13. Capex of another INR80b is
planned in India and USD450m in Novelis during FY14-15. Importantly, capex
cycle is expected to peak in FY13.
- Mahan smelter (359ktpa aluminum) is expected to start production in Dec-12
with 40 pots; commercial production of 140kt is expected in FY14. Captive
power plants will be operated on coal purchased in e-auction and imports.
Alumina will be sourced from Utkal project. INR86b out of the project cost of
INR107b has been spent so far. INR28b has been spent during 1HFY13 out of the
total target of INR38b for FY13. Another INR21b will be spent in FY14. About half
of the project cost will be capitalized in FY14.
- Utkal Alumina (1.5mtpa alumina refinery) is expected to complete mechanical
commissioning by Dec-12 and commercial production is expected to start in
1QFY14. Alumina production is expected to be 400kt in FY14. The 22kms road to
the bauxite mines has been made ready. The conveyor will be completed later
at a capex of INR10b. Bauxite mining is expected to start by Mar-13. INR44b out
of the total project cost of INR72b has already been spent.
- Aditya smelter (359ktpa aluminum) project cost has escalated to INR132b.
INR67b has already been spent on the projects. INR28b was spent in 1HFY13
while another INR18b will be spent in 2HFY13. The project is expected to be
completed over 2 years. Talabira-2 coal block is being developed in JV with MCL,
which holds a 70% stake in the mine while Hindalco has a 15% stake in the mine.
- INR1.8b has been spent so far in Jharkhand for land acquisition and INR2b
towards Aditya Alumina. The Jharkhand smelter has been allotted Tubet coal
block in JV with Tata Power, while Aditya Alumina has been allotted Kodigamali
bauxite mine. These projects are being pursued along with the progress on
- Hirakud smelter’s captive power plant is partially closed due to breach of ash
pond recently, which is likely to affect production for couple of quarter. The
expansion of capacity to 213kt and the relocated FRP facilities are expected to
be commissioned by end of FY13.
- Copper smelter’s performance is expected to bounce back in 2QFY13 with
improved production.
- Aluminum demand remains strong in India and high physical spot premiums are
helping margins.
Valuations already factor most negatives; conversion business provides 70% of
operating cash flows and is insulated from LME volatility; BUY
- We expect consolidated EBITDA to increase 14% YoY to INR100.8b in FY14
driven by 28% growth in primary aluminum production to 700kt and 36%
growth in alumina production to 1.9mt in India and 6% growth in volumes of
01 Oct 2012
Update |Sector: Metals
 Motilal Oswal Financial Services
Novelis. EPS growth, however, will be lower at 9% to INR20.6 due to higher
interest and depreciation charge.
We believe that the annual group capex will peak in FY13 at INR130b and halve
in FY14 to INR68b. Since most of the capex at Novelis will be completed in FY14,
there is a possibility of dividend in FY15.
IRR of Mahan and Aditya smelter is low at 6.6% and 5.5% respectively at LME of
USD2100, as per our calculations. As a result, the NPV of these projects is
negative INR62b and negative INR87b respectively, assuming that coal will be
purchased at market price. Utkal Alumina has a positive NPV of INR4b assuming
that the bauxite will be available from captive mines. The implied value of CWIP
is at a discount of INR136b (INR229b of estimated CWIP at the end of FY14) to
the book value. Clearly, current valuations already factor the likely future value
We believe that Hindalco offers the best risk adjusted returns for long term
investors although investment in greenfield projects will only yield low IRR’s
currently. Any run up in LME price for aluminum will result in stock performance
in short term as well. Current stock price already factors low LME price for
aluminum and all the future value destruction from greenfield projects.
Currently, conversion business accounts for approximately 70% of cash flows,
which is insulated from LME volatiltiy.
We value Hindalco at SOTP of INR161 based on 5.5x EV/EBTIDA for earnings
from operating assets and 72% value for unfinished capex as the average IRR on
CWIP is 7.2% against 10% WACC. Maintain BUY.
Valuations: CWIP valued at 58% discount to Book value
01 Oct 2012
 Motilal Oswal Financial Services
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01 Oct 2012