Sector Update | 9 January 2018
Metals
Company name
Coal India
Hindalco
Vedanta
Nalco
Pg. no.
5
9
13
17
Upgrading earnings for Coal India led by big price hike
But lowering EPS estimates for aluminum smelters
Coal price hike of 8%:
Coal India (COAL) has announced a price hike of INR64b for
FY19E, based on its target coal production of 630mt. This translates into an average
price hike of ~INR100/t, which is ~8% of average realization in FY18 for linkage
supply.
Steep price hikes in many grades:
We note that the price hike is not uniform across
grades (Exhibits 1 and 2), as COAL has tried to rationalize pricing on INR/Kcal basis
(refer Column 3 & 4). Grades 11-14 have witnessed a sharper price increase
compared to grades 8-9. Price hike for grades 6-7 is steepest. Prices for grades 1-5
and grades 15-17 – which account for barely 8% of its total volumes – have been
reduced slightly. COAL intends to move fully toward INR/kcal basis of pricing from 1
st
April 2018, which should be revenue-neutral if not revenue-accretive.
Imports are still very expensive:
COAL’s prices remain highly competitive compared
to imports. According to our ballpark calculations (Exhibit 3), the average landed
price of coal on INR/kcal basis on India ports is at 80 – 159% premium to cost of coal
at COAL’s mines. However, this is not an absolute conclusion because consumers
have to add the inland transportation cost to arrive at the landed cost.
Aluminum smelters worst impacted:
The price hike is likely to increase average cost
of power generation by 7paise/kwh. For independent power generators, the
increase in cost is largely pass-through to the power distribution companies
(discoms), but non-power sector consumers like metal and cement producers will
have to absorb the cost increase. Aluminum smelters will be worst hit because the
production process is highly energy-intensive at 14,000kwh/t compared to other
metals – for example, 500kwh/t for BoF-based steel making, 1,000kwh/t for EAF-
based steel making, and 3,000-4,000kwh/t for zinc/copper/ferro-alloy production.
Secondary steel producers can easily absorb the cost increase as they are benefiting
from the steep steel price increase.
Earnings upgrade for COAL, but downgrade for Nalco, Hindalco and
Vedanta
We are increasing EPS of COAL by 29% for FY19E. However, we lower EPS by 5%
for Nalco, and 2% for Hindalco and Vedanta each (Exhibit 4).
We are also raising the target price by 6% to INR356/share for COAL. At the
same time, we are reducing the target price by 4% to INR81 for NACL (Nalco), by
2% to INR321 for HNDL (Hindalco) and by 2% to INR386 for VEDL (Vedanta) to
account for the cost increase. COAL and HNDL are our top picks.
Sanjay Jain - Research analyst
(SanjayJain@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal - Research analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
21
Oswal research
1
Motilal
November 2017
is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Metals
Exhibit 1: Non-power linkage price
w.e.f. 9 Jan 2018
Grade
No
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
GCV
(Kcal/Kg)
>7000
6,850
6,550
6,250
5,950
5,650
5,350
5,000
4,750
4,450
4,150
3,850
3,550
3,250
2,950
2,650
2,350
List price
(INR/T)
1
3,288
3,144
3,000
2,737
2,524
2,311
1,757
1,368
1,228
1,145
1,063
980
897
708
604
535
Coal India's list price
Revision
INR/Kcal
(INR/T)
New
old
2
3
4
-162
-66
0
-13
244
391
57
48
48
175
153
120
117
-12
-36
-35
0.48
0.48
0.48
0.46
0.45
0.43
0.35
0.29
0.28
0.28
0.28
0.28
0.28
0.24
0.23
0.23
0.50
0.49
0.48
0.46
0.40
0.36
0.34
0.28
0.27
0.23
0.24
0.24
0.24
0.24
0.24
0.24
Royalty
(INR/T)
5
855
817
780
383
353
324
246
192
172
160
149
137
126
99
85
75
Ex-mine price to consumer
Sizing
Cess
Total
(INR/T)
(INR/T)
(INR/T)
6
7
8
150
150
150
150
150
150
150
150
150
150
150
150
150
150
150
150
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
4,693
4,511
4,330
3,670
3,427
3,185
2,553
2,110
1,950
1,855
1,762
1,667
1,573
1,357
1,239
1,160
INR/Kcal
New
old
9
10
0.69
0.69
0.69
0.62
0.61
0.60
0.51
0.44
0.44
0.45
0.46
0.47
0.48
0.46
0.47
0.49
0.71
0.70
0.69
0.62
0.56
0.51
0.50
0.43
0.43
0.40
0.41
0.43
0.44
0.46
0.48
0.51
Source: MOSL
Exhibit 2: Power linkage price
w.e.f. 9 Jan 2018
Grade
No
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
GCV
(Kcal/Kg)
>7000
6,850
6,550
6,250
5,950
5,650
5,350
5,000
4,750
4,450
4,150
3,850
3,550
3,250
2,950
2,650
2,350
List price
(INR/T)
1
3,288
3,144
3,000
2,737
2,317
1,926
1,465
1,140
1,024
955
886
817
748
590
504
447
Coal India's list price
Revision
INR/Kcal
(INR/T)
New
old
2
3
4
-162
-66
0
-13
417
326
45
40
44
145
126
97
98
-10
-26
-23
0.48
0.48
0.48
0.46
0.41
0.36
0.29
0.24
0.23
0.23
0.23
0.23
0.23
0.20
0.19
0.19
0.50
0.49
0.48
0.46
0.34
0.30
0.28
0.23
0.22
0.20
0.20
0.20
0.20
0.20
0.20
0.20
Royalty
(INR/T)
5
855
817
780
383
324
270
205
160
143
134
124
114
105
83
71
63
Ex-mine price to consumer
Sizing
Cess
Total
(INR/T)
(INR/T)
(INR/T)
6
7
8
150
150
150
150
150
150
150
150
150
150
150
150
150
150
150
150
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
4,693
4,511
4,330
3,670
3,191
2,746
2,220
1,850
1,717
1,639
1,560
1,481
1,403
1,223
1,125
1,060
INR/Kcal
New
old
9
10
0.69
0.69
0.69
0.62
0.56
0.51
0.44
0.39
0.39
0.39
0.41
0.42
0.43
0.41
0.42
0.45
0.71
0.70
0.69
0.62
0.48
0.44
0.43
0.38
0.37
0.36
0.37
0.39
0.40
0.42
0.44
0.46
Source: MOSL
9 January 2018
2

Metals
Exhibit 3: Comparison of Coal India’s price at its mines and cost of coal import at ports
(a) Non-power linkage price
(FOR ex- mine basis) w.e.f. 9 Jan 2018
Grade GCV
No (Kcal/Kg)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
>7000
6,850
6,550
6,250
5,950
5,650
5,350
5,000
4,750
4,450
4,150
3,850
3,550
3,250
2,950
2,650
2,350
List price
(INR/T)
1
3,288
3,144
3,000
2,737
2,524
2,311
1,757
1,368
1,228
1,145
1,063
980
897
708
604
535
(c) Imported Coal duty paid
(FOR Indian ports basis)
Duty
Port
Royalty Sizing Cess Total INR Equi. Freight @2.5%
Ch.
Cess Total
INR/T INR/T INR/T INR/T /Kcal USD/t USD/t
USD/t
USD/t INR/T INR/T
5
6
7
8
9
11
12
13
14
15
16
855
817
780
383
353
324
246
192
172
160
149
137
126
99
85
75
150
150
150
150
150
150
150
150
150
150
150
150
150
150
150
150
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
4,693
4,511
4,330
3,670
3,427
3,185
2,553
2,110
1,950
1,855
1,762
1,667
1,573
1,357
1,239
1,160
0.69
0.69
0.69
0.62
0.61
0.60
0.51
0.44
0.44
0.45
0.46
0.47
0.48
0.46
0.47
0.49
106
101
96
92
87
82
77
64
56
48
38
36
36
33
29
26
12
12
12
12
12
12
12
9
9
9
9
9
9
9
9
9
2.9
2.8
2.7
2.6
2.5
2.4
2.2
1.8
1.6
1.4
1.2
1.1
1.1
1.0
0.9
0.9
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
400
8,451
8,148
7,844
7,541
7,238
6,934
6,580
5,453
4,940
4,426
3,770
3,639
3,639
3,421
3,203
2,985
Premium
(disc)
for imports
INR
16-8 17-9
/Kcal (INR/T) (%)
17
18
19
1.23
1.24
1.26
1.27
1.28
1.30
1.32
1.15
1.11
1.07
0.98
1.03
1.12
1.16
1.21
1.27
3,758
3,636
3,514
3,871
3,810
3,750
4,027
3,344
2,990
2,571
2,009
1,972
2,067
2,064
1,965
1,825
80
81
81
105
111
118
158
158
153
139
114
118
131
152
159
157
Source: MOSL
Exhibit 4: Changes to earnings and target price
New
FY19E
Coal India
EBITDA (ex-OBR)
EPS
TP
Hindalco
EBITDA
EPS
TP
Vedanta
EBITDA
EPS
TP
Nalco
EBITDA
EPS
TP
252
27
356
150
26
321
301
44
386
16.9
5.3
81
FY20E
293
31
FY19E
197
21
335
152
26
326
305
45
393
17.7
5.5
84
Old
FY20E
235
25
Change - %
FY19E
FY20E
28
29
6
-1
-2
-2
-1
-2
-2
-4.5
-5.0
-4
25
26
147
26
149
27
-1
-2
308
46
312
46
-1
-2
17.3
5.4
18.1
5.7
-4.4
-4.9
9 January 2018
3

Metals
Exhibit 5: Relative valuations
Rating
Steel
Tata Steel
Neutral
JSW Steel
Buy
JSPL
Buy
SAIL
Sell
Non-Ferrous
Hindalco
Buy
Nalco
Neutral
Vendanta
Buy
Rain Ind.
Buy
Mining
Coal India
Buy
Hindustan Zinc Neutral
NMDC
Buy
MCAP
(INR) (USD M)
772
283
248
98
272
85
337
459
304
317
155
11,709
10,680
3,548
6,311
8,754
3,409
15,615
2,410
29,973
20,904
9,566
CMP
EPS
FY17
37.9
14.8
-20.9
-6.4
8.6
3.7
15.1
9.6
14.9
19.7
10.0
FY18E
56.1
19.7
-18.0
-2.7
18.6
4.6
24.5
25.5
18.5
21.9
13.7
FY19E
62.8
24.9
-0.6
3.1
25.9
5.3
43.8
38.9
26.8
33.1
12.7
P/E (x)
FY18E
13.8
14.3
-13.8
-36.6
14.6
18.2
13.8
18.0
16.5
14.5
11.3
FY19E
12.3
11.4
-431.1
32.1
10.5
16.1
7.7
11.8
11.4
9.6
12.2
EV/EBITDA (x)
FY18E
7.4
8.7
11.5
24.8
7.1
8.6
8.2
9.3
8.8
9.2
7.3
FY19E
7.2
7.7
7.9
12.4
6.1
7.3
5.1
7.2
6.2
5.6
7.6
P/B(x)
FY18E
2.1
2.6
0.8
1.1
1.8
1.5
1.9
4.1
7.4
4.7
2.0
FY19E
1.9
2.1
0.8
1.1
1.6
1.4
1.7
3.1
6.9
3.6
1.9
Source: MOSL
9 January 2018
4

Coal India
BSE SENSEX
34,443
S&P CNX
10,637
9 January 2018
Metals
Update
| Sector:
Utilities
CMP: INR304
TP: INR356(+17%)
Buy
Price hike driving big earnings upgrade
Trades attractively at 6.2x EV/EBITDA and dividend yield of ~7% for FY19E
Price hike driving big earnings upgrade
Coal India (COAL) has announced a price hike of INR64b for FY19E, based on its
target coal production of 630mt. The company is likely to immediately realize the
price on linkage volumes. COAL will also realize some gains in e-auction, where coal
was getting sold at floor price. We are raising revenue by INR55b for FY19E. This is
in addition to the INR25b increase on account of evacuation charges announced
recently. EBITDA (ex-OBR) is raised by 28%/25% to INR252b/INR293b and EPS by
29%/26% to INR27/INR31 per share for FY19E/20E.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
COAL IN
6,207
332 / 234
11/12/-28
1,786.8
28.2
1264
21.1
Expect earnings CAGR of ~34% over FY17-19E
Financials Snapshot (INR b)
2017 2018E
Y/E MAR
782.2
842.5
Net Sales
149.1
174.1
EBITDA
92.7
114.6
PAT
14.9
18.5
EPS (INR)
-34.0
23.7
Gr. (%)
39.5
41.4
BV/Sh (INR)
37.8
44.6
RoE (%)
32.2
45.5
RoCE (%)
20.4
16.5
P/E (x)
7.7
7.4
P/BV (x)
2019E
941.6
251.9
166.2
26.8
45.0
44.0
60.8
62.2
11.4
6.9
Shareholding pattern (%)
Sep-17 Jun-17 Sep-16
As On
Promoter
78.9
78.9
79.7
DII
11.9
11.5
10.3
FII
5.6
6.4
7.8
Others
3.7
3.3
2.3
FII Includes depository receipts
Stock Performance (1-year)
Coal India
Sensex - Rebased
400
The increase in coal prices, along with the recent introduction of evacuation
charges (link), has significantly improved the earnings outlook for COAL. The
price hikes more than offset the drag from recent wage increases.
We expect adjusted EBITDA (ex-OBR but including other operating income)
CAGR of ~30% and PAT CAGR of ~34% over FY17-19, driven by the price hike,
annual volume growth of ~7%, and operating leverage.
Concerns around grade slippage, e-auction price decline, deceleration in
volume growth and wage hikes are now behind. Volume growth is accelerating,
which, in turn, will drive operating leverage gains. Various cost initiatives like
closing of underground mines, VRS, overtime compensation and others can
drive upside to our estimates.
Even after the recent price hike, COAL’s prices (ex-inland transportation cost)
are 50-60% cheaper compared to imports.
On realization of the awaited price hike and the earnings upgrade, we are
toning down the target EV/EBITDA multiple to 7.5x (from 8x), in line with the
historical trend. As a combined effect of earnings upgrade and target multiple
adjustment, the target price is raised by 6% to INR356/share (17% upside).
COAL is trading attractively at 6.2x FY19E EV/EBITDA and dividend yield of ~7%.
This implies a total stock return of 24% in one year. Re-iterate
Buy.
350
300
250
200
9 January 2018
5

Metals
Exhibit 6: Adjusted P&L and target price
Revenue
Power FSA
Non Power FSA
Eauction/MoU
Sales (mt)
YoY (%)
Power FSA
Share (%)
Non Power FSA
Eauction/MoU
Revenue per ton
YoY (%)
Power FSA
Non Power FSA
Eauction/MoU
Cost of Mining (ex. OB)
CoP per ton
YoY (%)
Labor & social OH
Contract
R&M
Others
Adjusted EBIDTA
Power FSA
Share (%)
Non Power FSA
Share (%)
Eauction/MoU
Share (%)
EBITDA per ton
Target Price calculations
Adjusted EBIDTA
Target EV/EBITDA (x)
Target EV
Net debt
Target Equity value
TP (INR/share)
FY14
706,075
461,456
74,138
170,481
472
1.6
354
75
42
75
1,497
-0.4
1,304
1,747
2,263
495,603
1,051
3.7
604
145
170
132
210,472
89,602
43
29,546
14
91,324
43
446
FY14
210,472
FY15
741,201
511,628
72,150
157,423
489
3.8
385
79
41
63
1,515
1.2
1,328
1,777
2,484
529,580
1,082
3.0
617
174
171
120
211,621
94,569
45
28,215
13
88,837
42
432
FY15
211,621
FY16
780,073
537,007
69,584
173,481
534
9.2
409
76
40
86
1,459
-3.6
1,314
1,758
2,013
564,649
1,056
-2.4
584
208
155
109
215,423
105,197
49
27,772
13
82,454
38
403
FY16
215,423
7.5
1,615,675
-471,951
2,087,625
336
FY17
782,206
493,234
86,408
202,564
543
1.6
380
70
50
113
1,441
-1.3
1,298
1,735
1,790
633,085
1,166
10.4
626
227
152
161
149,121
50,150
34
28,353
19
70,618
47
275
FY17E
149,121
7.5
1,118,409
-383,904
1,502,313
242
FY18E
842,539
505,148
95,757
241,634
580
6.8
399
69
55
126
1,453
0.8
1,266
1,741
1,918
668,476
1,153
-1.2
636
222
149
146
174,063
45,283
26
32,367
19
96,413
55
300
FY18E
174,063
7.5
1,305,472
-356,845
1,662,316
268
FY19E
941,553
598,843
110,356
232,354
618
6.6
439
71
60
119
1,524
4.9
1,364
1,839
1,952
689,617
1,116
-3.2
593
233
146
144
251,935
109,025
43
43,403
17
99,508
39
408
FY19E
251,935
7.5
1,889,516
-318,710
2,208,226
356
FY20E
1,002,946
628,772
119,550
254,623
657
6.3
461
70
65
131
1,527
0.2
1,364
1,839
1,942
710,125
1,081
-3.1
553
243
144
141
292,821
130,607
45
49,294
17
112,920
39
446
FY20E
292,821
7.5
2,196,156
-292,533
2,488,689
401
Source: MOSL, Company
9 January 2018
6

Metals
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2013
697,718
9.3
227,544
32.6
50,147
177,397
452
72,777
69
249,790
76,227
30.5
0
173,564
176,624
9.3
2014
706,075
1.2
210,472
29.8
52,830
157,643
580
71,719
14
228,795
77,679
34.0
0
151,116
159,881
-9.5
2015
741,201
5.0
211,621
28.6
61,465
150,156
73
65,706
50
215,839
78,573
36.4
0
137,266
137,266
-14.1
2016
780,073
5.2
211,148
27.1
56,373
154,775
3,862
59,406
0
210,319
71,719
34.1
0
138,601
138,601
1.0
2017
782,206
0.3
149,121
19.1
55,823
93,298
4,117
55,156
0
144,337
51,660
35.8
0
92,678
92,678
-33.1
2018E
842,539
7.7
174,063
20.7
41,560
132,503
3,575
39,596
0
168,523
53,911
32.0
0
114,613
114,613
23.7
(INR Million)
2019E
941,553
11.8
251,935
26.8
43,803
208,132
3,611
36,280
0
240,802
74,624
31.0
0
166,177
166,177
45.0
2020E
1,002,946
6.5
292,821
29.2
46,025
246,796
3,647
32,560
0
275,709
82,685
30.0
0
193,024
193,024
16.2
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2013
63,164
421,556
484,720
10,778
-22,550
473,584
390,107
255,449
134,658
34,960
0
1,023,540
56,178
104,802
646,310
216,250
719,573
719,573
0
303,967
473,584
2014
63,164
360,881
424,045
1,715
-19,717
406,678
414,795
266,951
147,844
43,158
0
831,704
55,681
82,410
561,644
131,969
616,028
616,028
0
215,676
406,678
2015
63,164
340,367
403,531
4,019
-19,591
388,617
448,080
286,929
161,150
51,594
0
873,074
61,838
85,219
559,060
166,958
697,201
697,201
0
175,873
388,617
2016
63,164
285,168
348,332
11,921
-20,445
340,855
234,137
26,824
207,314
59,044
73
841,406
75,692
114,476
483,872
167,367
766,982
766,982
0
74,425
340,855
2017
62,074
183,194
245,268
30,078
-27,328
251,477
276,883
55,984
220,900
103,078
106
809,377
89,453
107,359
413,982
198,584
881,984
881,984
0
-72,607
251,477
2018E
62,074
194,655
256,729
30,078
-27,328
262,939
336,883
85,364
251,519
123,078
106
754,015
69,250
99,258
386,923
198,584
865,780
865,780
0
-111,765
262,939
(INR Million)
2019E
62,074
211,273
273,347
30,078
-27,328
279,556
396,883
116,545
280,339
143,078
106
735,683
77,388
110,923
348,788
198,584
879,650
879,650
0
-143,967
279,556
2020E
62,074
230,575
292,649
30,078
-27,328
298,859
456,883
149,525
307,358
163,078
106
721,784
82,434
118,155
322,611
198,584
893,469
893,469
0
-171,684
298,859
9 January 2018
7

Metals
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Price / Book Value
EV/EBITDA
Dividend Yield (%)
EV /ton of Reserves
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2013
28.0
35.9
76.7
14.0
56.7
2014
25.3
33.7
67.1
29.0
130.3
2015
21.7
31.5
63.9
20.7
112.9
14.0
4.8
6.3
6.8
61.5
1.7
34.0
34.5
-45.5
17.5
1.9
42
30
5
-1.4
2016
22.6
31.5
55.1
27.4
145.5
13.5
5.5
6.6
9.0
65.4
2.0
41.0
39.9
-49.9
6.7
2.3
54
35
15
-1.4
2017
14.9
23.9
39.5
19.9
163.0
20.4
7.7
10.1
6.5
69.4
3.3
37.8
32.2
-25.6
8.0
3.1
50
42
18
-1.6
2018E
18.5
25.2
41.4
13.8
90.0
16.5
7.4
8.8
4.5
70.7
2.0
44.6
45.5
-35.1
13.5
3.2
43
30
5
-1.4
2019E
26.8
33.8
44.0
20.1
90.0
11.4
6.9
6.2
6.6
72.4
2.0
60.8
62.2
-62.5
15.6
3.4
43
30
5
-1.2
2020E
31.1
38.5
47.1
23.3
90.0
9.8
6.5
5.5
7.6
73.6
2.0
66.0
67.6
-86.5
15.8
3.4
43
30
5
-1.0
1.5
35.8
39.5
-57.0
5.8
1.5
55
29
4
-1.3
1.7
35.6
34.4
-51.3
5.9
1.7
43
29
4
-1.3
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2013
227,544
18,457
-68,387
-86,520
0
91,094
-24,540
66,554
-4,136
56,433
27,758
0
-2,287
-452
-75,781
-78,520
40,332
601,842
642,174
2014
210,472
20,597
2,442
-88,264
0
145,247
-41,164
104,083
-13,799
64,754
9,791
0
-12,634
-580
-240,289
-253,503
-98,465
646,310
547,845
2015
211,621
21,428
6,487
-95,721
0
143,815
-49,014
94,801
9,615
52,871
13,472
0
1,935
-73
-152,119
-150,257
7,030
561,644
568,674
2016
211,148
25,840
-26,697
-78,754
0
131,538
-57,857
73,681
-1
50,349
-7,508
0
9,902
-207
-205,569
-195,874
-71,844
559,060
487,216
2017
149,121
38,558
60,216
-89,427
0
158,469
-86,761
71,707
-50
34,642
-52,170
-45,531
18,169
-306
-148,311
-175,980
-69,681
483,872
414,190
2018E
174,063
39,596
-81
-53,911
0
159,668
-80,000
79,668
0
0
-80,000
0
0
-3,575
-103,151
-106,727
-27,059
413,982
386,923
(INR Million)
2019E
251,935
36,280
-18,555
-74,624
0
195,036
-80,000
115,036
0
0
-80,000
0
0
-3,611
-149,559
-153,171
-38,134
386,923
348,788
2020E
292,821
32,560
-11,505
-82,685
0
231,191
-80,000
151,191
0
0
-80,000
0
0
-3,647
-173,721
-177,368
-26,177
348,788
322,611
9 January 2018
8

9 January 2018
Metals
Update
| Sector:
Metals
Hindalco
BSE SENSEX
34,443
S&P CNX
10,637
CMP: INR272
TP: INR321 (+18%)
Buy
Least impacted by Coal India’s price hike
De-risked business model delivering strong free cash flow
HNDL least impacted from coal price hike due to a diversified mix
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
HNDL IN
2,245
284 / 158
10/27/43
619.1
9.8
2456
65.3
The impact of the notified coal price increase by Coal India is the least for HNDL
among the domestic aluminum smelters due to its well diversified mix of coal
supply. HNDL sources ~25% of its coal from captive coal mines that are not
impacted by the price increase. Another ~20% is sourced under linkage coal from
the Krishnashila coal mine of NCL, which supplies G5 and G8 grade of coal. The
notified price has been cut by INR13/ton for G5 grade and increased by INR57/ton
for G8 grade, lower than Coal India’s average price increase of ~INR110/ton.
Factoring the blended coal price increase, HNDL’s EBITDA estimate is cut by ~1%
and PAT estimate by ~2% for FY19/20E.
Financials Snapshot (INR b)
2017
2018E 2019E
Y/E MAR
1,001.8 1,119.3 1,150.0
Net Sales
124.4
139.4
150.1
EBITDA
19.1
41.4
57.6
PAT
8.6
18.6
25.9
EPS (INR)
260.7
117.2
39.1
Gr. (%)
147.0
171.4
BV/Sh(INR) 129.9
7.4
13.4
16.2
RoE (%)
7.3
8.7
10.0
RoCE (%)
32.2
14.8
10.7
P/E (x)
2.1
1.9
1.6
P/BV (x)
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
34.7
34.7
37.7
DII
17.8
18.5
15.8
FII
28.4
27.3
25.4
Others
19.1
19.5
21.2
FII Includes depository receipts
Stock Performance (1-year)
Hindalco Inds.
Sensex - Rebased
300
Maintain Buy
250
200
150
Hindalco’s business is robust and de-risked. Copper and Novelis operate on a
conversion model, with LME being a pass-through. These two businesses
account for more than 60% of EBITDA, as well as provide steady cash flow and
support balance sheet. Primary aluminum smelting is exposed to volatility in
LME, but is co-related to metal cycle.
HNDL is among the first-quartile cost producers of primarily aluminum due to
its access to high-quality bauxite, strong logistics, and conveyors for bulk
transportation of minerals from mines. It has secured a diversified mix of coal
supply in proximity to its captive power plants. We are more bullish on LME
due to the rising cost of production for smelters globally. HNDL will benefit
from its integration.
Novelis has global leadership in supplying flat-rolled products to the auto
industry. Novelis will continue looking for expansion in the auto space to cater
to strong demand growth. New investments are expected in the US and China.
Pricing pressure in the can business has eased. Electric vehicles are likely to
accelerate light weighting of vehicles and drive demand for aluminum.
Free cash flow generation is rising rapidly. Novelis is shifting its focus on
growth to tap the opportunity from the growing market of aluminum in
automotive. In India, the focus is on high-IRR and less-capital-intensive
downstream projects in aluminum. Improving FCF generation and business
outlook are driving significant savings in interest cost.
For HNDL, we estimate consolidated EBITDA CAGR of ~20% over FY17-19E to
INR150b on higher aluminum LME, the improving performance at Novelis, and
the benefit from its integrated operations. PAT will rise faster at a CAGR of
~74% to INR57b, driven by savings in interest cost.
The stock is trading at 6.5x FY19E EV/EBITDA. We value the stock at
INR321/share based on SOTP. Re-iterate
Buy.
9 January 2018
9

Metals
Exhibit 7: Target price calculation
Y/E March
EBITDA
EV/EBTIDAx
Target EV
Net Debt
EQ = (EV-net Debt)
A. INR/share(EQ)
Investments (quoted)
B. INR/share (invest)
C.discount factor (%)
Equity Value (A+B*(1-C%))
Assumptions
USD/INR
LME
2016
86,542
2017
124,359
2018E
139,444
6.5
906,384
388,036
518,348
233
68,340
31
20
257
64.8
1,955
2019E
150,147
6.5
975,958
316,148
659,810
296
68,340
31
20
321
65.0
2,025
2020E
147,143
6.5
956,428
237,496
718,932
323
68,340
31
20
347
65.0
1,950
553,792
465,385
67.1
1,687
Source: MOSL, Company
9 January 2018
10

Metals
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2013
801,928
-0.8
80,584
10.0
28,611
51,973
20,791
10,122
-2,216
39,088
8,857
22.7
-38
30,269
32,485
-4.4
2014
876,955
9.4
82,863
9.4
35,528
47,335
27,016
10,172
-3,960
26,531
5,249
19.8
-468
21,750
25,710
-20.9
2015
1,042,811
18.9
89,446
8.6
35,906
53,540
41,784
11,047
-19,401
3,402
2,564
75.4
-7,704
8,542
27,943
8.7
2016
987,589
-5.3
86,542
8.8
43,468
43,074
51,338
11,888
-5,765
-2,141
4,984
-232.8
-6,223
-902
4,863
-82.6
2017
1,001,838
1.4
124,359
12.4
44,572
79,786
57,424
11,110
-76
33,395
14,326
42.9
77
18,992
19,069
292.1
2018E
1,119,285
11.7
139,444
12.5
44,883
94,561
40,864
10,461
0
64,159
22,607
35.2
144
41,408
41,408
117.2
(INR Million)
2019E
1,150,018
2.7
150,147
13.1
45,541
104,606
33,658
9,826
0
80,774
22,925
28.4
251
57,597
57,597
39.1
2020E
1,145,996
-0.3
147,143
12.8
46,638
100,505
26,812
8,548
0
82,241
23,376
28.4
251
58,614
58,614
1.8
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Minority Interest
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Goodwill on consolidation
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Net Current Assets
Total Assets
2013
1,915
351,388
353,302
17,593
569,061
34,677
974,633
482,107
221,255
260,852
160,497
338,311
15,962
430,275
143,317
89,523
105,771
91,664
231,263
199,011
974,633
2014
2,065
403,984
406,048
17,805
646,952
31,750
1,102,555
748,947
267,361
481,586
169,371
230,593
23,381
474,889
166,943
92,348
117,121
98,477
277,263
197,626
1,102,555
2015
2,065
381,220
383,285
9,561
684,050
25,552
1,102,448
887,802
299,816
587,986
165,651
141,113
23,216
499,495
184,511
91,864
119,289
103,830
315,011
184,484
1,102,448
2016
2,049
404,017
406,066
3,813
674,754
20,970
1,105,603
1,057,871
378,494
679,377
177,353
42,138
47,488
465,104
167,873
79,184
120,962
97,085
305,857
159,247
1,105,603
2017
2,227
458,361
460,588
62
637,515
20,168
1,118,333
1,040,510
364,991
675,518
171,350
18,139
62,057
529,543
182,914
82,748
172,129
91,752
338,275
191,269
1,118,333
2018E
2,227
496,453
498,680
-45
537,008
25,419
1,061,061
1,038,301
409,874
628,427
171,350
19,726
61,806
537,510
202,643
94,143
148,971
91,752
357,757
179,753
1,061,061
(INR Million)
2019E
2,227
550,868
553,095
-45
451,136
28,063
1,032,248
1,064,551
455,416
609,135
171,350
21,300
61,554
531,895
208,604
96,550
134,988
91,752
362,986
168,909
1,032,248
2020E
2,227
606,360
608,587
-45
384,571
31,676
1,024,790
1,090,801
502,054
588,747
171,350
22,906
61,303
542,835
207,730
96,277
147,075
91,752
362,351
180,483
1,024,790
9 January 2018
11

Metals
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC (pre-tax)
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2013
17.0
30.7
100.7
1.4
9.7
16.3
9.0
2.7
12.3
0.5
18.0
5.9
10.7
0.8
41
65
44
2.4
2014
12.5
27.5
114.6
1.0
9.4
22.1
10.0
2.4
13.3
0.4
11.6
4.6
7.6
0.8
38
69
54
2.2
2015
13.5
17.8
105.4
1.0
8.6
20.4
15.5
2.6
12.7
0.4
12.3
4.9
6.9
0.9
32
65
54
2.6
2016
2.4
17.7
111.6
1.0
49.3
116.2
15.5
2.5
12.9
0.4
2.2
3.9
5.0
0.9
29
62
56
2.4
2017
8.6
28.6
129.9
1.1
15.0
32.2
9.7
2.1
8.7
0.4
7.4
7.3
9.1
0.9
30
67
65
1.6
2018E
18.6
38.8
147.0
1.4
8.8
14.8
7.1
1.9
7.2
0.5
13.4
8.7
11.1
1.1
31
66
65
1.2
2019E
25.9
46.4
171.4
1.4
6.3
10.7
5.9
1.6
6.2
0.5
16.2
10.0
12.7
1.1
31
66
65
0.8
2020E
26.3
47.4
196.3
1.4
6.2
10.5
5.8
1.4
5.8
0.5
14.3
9.8
12.5
1.1
31
66
65
0.5
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2013
80,584
1,410
-38,740
-13,478
0
29,776
-118,711
-88,936
10,729
-357
-108,340
128
143,356
-36,728
-3,977
102,779
24,215
81,556
105,771
2014
82,863
-4,821
9,623
-9,586
0
78,079
-94,236
-16,156
10,910
1,672
-81,655
16,305
48,689
-46,919
-3,149
14,926
11,351
105,771
117,121
2015
89,446
-5,872
-863
-11,280
0
71,431
-59,776
11,655
15,680
-796
-44,892
47
28,323
-50,253
-2,488
-24,371
2,168
117,121
119,289
2016
86,542
1,543
41,083
-12,291
0
116,877
-42,452
74,426
7,234
8,632
-26,586
1
-36,003
-50,057
-2,558
-88,619
1,673
119,289
120,962
2017
124,359
3,622
6,691
-7,797
0
126,875
-29,376
97,499
1,491
7,701
-20,185
33,141
-25,430
-60,754
-2,479
-55,523
51,167
120,962
172,129
2018E
139,444
332
-11,642
-17,356
0
110,778
-27,792
82,986
10,461
20,417
3,087
0
-92,511
-40,864
-3,648
-137,023
-23,158
172,129
148,971
(INR Million)
2019E
150,147
465
-3,139
-20,281
0
127,192
-27,824
99,368
9,826
0
-17,998
0
-85,872
-33,658
-3,648
-123,178
-13,984
148,971
134,988
2020E
147,143
527
513
-19,763
0
128,420
-27,856
100,563
8,548
0
-19,308
0
-66,564
-26,812
-3,648
-97,024
12,087
134,988
147,075
9 January 2018
12

9 January 2018
Metals
Update
| Sector:
Metals
Vedanta
Buy
BSE SENSEX
34,443
S&P CNX
10,637
CMP: INR337
TP: INR386(+15%)
Cost of aluminum production increasing
We lower earnings by 2% for FY19E
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Financials Snapshot (INR b)
2017
2018E
Y/E MAR
722.3
864.7
Net Sales
213.3
247.7
EBITDA
56.3
91.1
PAT
15.1
24.5
EPS (INR)
-79.1
61.9
Gr. (%)
174.6
BV/Sh(INR) 162.7
9.7
14.5
RoE (%)
12.4
14.3
RoCE (%)
22.2
13.7
P/E (x)
2.1
1.9
P/BV (x)
VEDL IN
3,717
347 / 218
12/22/16
1,254.4
19.7
3090
49.8
Aluminum EBITDA estimate cut by 7-8%
We assume ~INR110 per ton (equal to the increase in COAL’s average price)
increase in the cost for coal for Vedanta’s aluminum smelters at Jharsuguda and
Balco. Cost of aluminum production will increase by ~USD30 per ton. Aluminum
segment EBITDA estimate is cut by 7-8% and consolidated attributable EBITDA is
cut by ~1% for FY19/20E to factor in the coal price hike impact. PAT is cut by ~2%.
Volume growth and price increase to drive strong earnings growth
2019E
1,065.5
376.9
162.8
43.8
78.6
197.3
23.5
21.2
7.7
1.7
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
50.2
50.1
62.9
DII
13.1
13.4
6.9
FII
18.2
17.8
16.4
Others
18.5
18.7
13.9
FII Includes depository receipts
Stock Performance (1-year)
Vedanta
Sensex - Rebased
350
Vedanta has a portfolio of high-quality base metal and oil & gas assets, and is
well poised to benefit from the bullish outlook for commodity prices.
Volume growth will continue accelerating at zinc and oil & gas driven by
expansion capex, and at aluminum driven by ramp-up of existing capacities.
We estimate a CAGR of ~10% in India refined zinc volumes, ~35% in zinc
international volumes, ~22% in aluminum and ~8% in oil & gas over FY17-20,
driving strong earnings growth.
The outlook for base metal prices has improved, led by China’s supply-side and
environment measures, as well as improving global demand. Crude oil prices
are also supportive on the back of supply control by OPEC. The zinc market
remains tight even as demand growth is modest on lag in supply response.
Thus, the price outlook remains bullish.
FCF generation has improved sharply even as the company embarks on the
next phase of capex. Dividend payout has also improved.
We estimate attributable EBITDA CAGR of ~31% to INR301b and EPS CAGR of
~70% to ~INR44/share over FY17-19E.
We value the stock on FY19E SOTP basis at INR386/share. Maintain
Buy.
300
250
200
9 January 2018
13

Metals
Exhibit 8: Target price calculation
EBITDA
FY18E FY19E FY20E
VEDL (ex HZL)
Copper
Aluminum
Iron ore
Power(TSPL)
Power(other)
Zinc-Int
Oil&Gas
Sub. Tot.
Less: Net Debt
Equity Value
Hind. Zinc
HZL
Less: Net Debt
Equity Value
INR/share of HZL
VEDL
HZL@64.9%
VEDL (ex HZL)
Tot. Equity Value
INR/share
DPS
Yield
13
24
6
13
2
16
54
128
17
56
9
13
4
28
68
195
18
55
7
12
4
42
72
210
EV
EBITDA (x)
6.5
6.5
6.5
DCF
6.5
6.5
DCF
5.0
Enterprise Value
FY18E FY19E FY20E
87
157
37
87
11
103
168
650
539
112
113
361
57
80
29
183
150
972
508
465
116
358
47
76
29
270
132
1,027
474
553
Volumes (kt/kbpd)
FY18E FY19E FY20E
391
1,581
5,500
399
2,001
5,500
408
2,192
5,500
Prices (USD/t or bbl)
FY18E FY19E FY20E
6,068
2,004
66
5,464
2,000
65
5,455
2,000
56
172
160
197
192
PPA
Merchant and RE
345
2,992 3,800
207
56
60
64.6
65.0
2,992
2,433
39
65.0
65.0
3,800
2,750
41
3,200
60
65.0
65.0
3,200
2,750
41
USD/INR Avg. --->
USD/INR year end -->
795
154
499
854
179
545
934
202
628
122
182
171
6.5
794 1,180 1,109
-220 -315 -411
1,014 1,495 1,520
240
354
360
Equity Value
658
970
986
112
465
553
770 1,435 1,539
207
386
414
7.6
13.7
14.2
2.3
4.1
4.2
Source: MOSL, Company
9 January 2018
14

Metals
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2013
25,544
-69.3
4,808
18.8
1,975
2,833
4,394
539
0
-1,022
-429
42.0
0
-593
-593
-102.1
2014
725,850
2,741.5
256,640
35.4
84,250
172,390
61,110
23,090
580
134,950
10,000
7.4
73,430
51,520
50,940
-8,690.2
2015
749,223
3.2
221,381
29.5
71,616
149,765
56,989
28,910
-186,465
-64,779
19,488
-30.1
42,704
-126,970
59,495
16.8
2016
642,618
-14.2
151,516
23.6
85,724
65,791
57,781
44,436
-337,847
-285,402
-106,776
37.4
-55,919
-122,705
215,143
261.6
2017
722,250
12.4
213,319
29.5
62,915
150,404
58,550
45,806
-1,144
136,516
37,783
27.7
43,584
55,122
56,266
-73.8
2018E
864,722
19.7
247,739
28.6
57,069
190,670
57,385
37,672
1,860
172,818
44,731
25.9
35,131
92,975
91,115
61.9
2019E
1,065,511
23.2
376,861
35.4
62,679
314,182
55,280
37,149
0
296,050
77,462
26.2
55,818
162,768
162,768
78.6
(INR Million)
2020E
1,121,389
5.2
380,867
34.0
68,717
312,150
54,257
44,722
0
302,615
79,180
26.2
53,963
169,469
169,469
4.1
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2013
869
173,885
174,754
45,015
253
220,022
50,990
9,626
41,365
7,225
158,820
21,481
9,610
1,424
2,130
8,318
8,870
5,471
3,398
12,612
220,022
2014
2,965
727,122
730,087
805,660
27,352
1,901,073
1,163,255
291,200
872,054
431,277
2,086
835,766
90,338
46,537
453,850
245,041
240,110
41,346
198,764
595,656
1,901,073
2015
2,965
584,398
587,363
777,054
82,551
1,914,733
1,566,988
563,103
1,003,885
400,234
323
749,569
86,905
35,604
505,582
121,478
239,277
53,533
185,744
510,292
1,914,733
2016
2,965
437,427
440,392
812,934
-52,679
1,566,258
1,506,034
728,375
777,659
279,260
488
809,719
80,117
25,279
570,460
133,864
300,867
62,124
238,743
508,852
1,566,258
2017
3,718
601,284
605,001
906,308
-54,084
1,596,505
1,641,342
774,935
866,407
176,709
729
871,531
96,279
34,093
610,119
131,040
318,871
71,288
247,583
552,660
1,596,505
2018E
3,718
645,521
649,239
827,997
-52,091
1,599,555
1,726,452
832,004
894,448
149,333
749
815,725
113,717
40,275
530,694
131,040
260,700
85,288
175,413
555,025
1,599,555
2019E
3,718
729,598
733,315
797,897
-48,642
1,712,799
1,835,659
894,683
940,976
91,908
748
959,671
140,122
49,627
638,883
131,040
280,504
105,091
175,413
679,167
1,712,799
(INR Million)
2020E
3,718
818,631
822,348
797,897
-45,116
1,859,321
1,943,524
963,400
980,124
40,608
745
1,123,858
147,470
52,229
793,120
131,040
286,015
110,603
175,413
837,843
1,859,321
9 January 2018
15

Metals
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC (pre-tax)
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2013
-0.7
1.6
201.1
3.5
-615.5
2014
17.2
45.6
246.2
3.3
22.7
2015
20.1
44.2
198.1
3.5
20.9
2016
72.6
101.5
148.5
5.9
9.7
0.0
0.0
0.0
0.0
0.0
-0.4
1.6
1.4
0.7
20
137
78
0.2
7.7
18.4
20.7
1.6
23
45
21
0.5
9.0
9.4
10.5
0.8
17
42
26
0.5
41.9
6.3
5.5
0.7
14
46
35
0.6
2017
15.1
32.1
162.7
19.5
154.2
22.2
2.1
2.3
9.3
5.8
9.7
12.4
15.2
0.9
17
49
36
0.5
2018E
24.5
39.9
174.6
7.6
37.4
13.7
1.9
1.9
8.2
2.3
14.5
14.3
18.6
1.0
17
48
36
0.5
2019E
43.8
60.6
197.3
13.7
37.5
7.7
1.7
1.4
5.0
4.1
23.5
21.2
29.3
1.2
17
48
36
0.2
2020E
45.6
64.1
221.2
14.2
37.4
7.4
1.5
1.2
4.5
4.2
21.8
20.0
29.2
1.2
17
48
36
0.0
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2013
4,808
-1,426
-2,818
429
0
993
-733
260
19,088
-26,443
-8,088
0
7,602
-4,394
0
3,208
-3,887
6,017
2,130
2014
256,640
-46,653
-10,239
-43,741
0
156,008
-72,836
83,172
-4,105
14,967
-61,974
0
18,380
-46,752
-22,144
-50,516
43,518
410,333
453,850
2015
221,381
15,811
-25,345
-33,796
0
178,051
-106,561
71,490
71,972
4,371
-30,218
0
-45,596
-62,898
-31,063
-139,558
8,276
453,850
462,126
2016
151,516
-254
39,820
-24,513
0
166,568
-54,975
111,593
19,262
10,548
-25,165
0
12,278
-57,966
-30,838
-76,526
64,878
505,582
570,460
2017
213,319
1,559
-7,404
-20,438
0
187,036
-55,010
132,026
26,986
-18,687
-46,712
-1,010
91,499
-61,501
-129,653
-100,665
39,660
570,460
610,119
2018E
247,739
0
-81,790
-42,739
0
123,210
-57,735
65,475
0
37,672
-20,062
0
-79,078
-57,385
-46,111
-182,573
-79,426
610,119
530,694
(INR Million)
2019E
376,861
0
-15,953
-74,012
0
286,895
-51,783
235,113
0
37,149
-14,634
0
-30,100
-55,280
-78,692
-164,072
108,189
530,694
638,883
2020E
380,867
0
-4,440
-75,654
0
300,773
-56,565
244,208
0
44,722
-11,843
0
0
-54,257
-80,437
-134,694
154,237
638,883
793,120
9 January 2018
16

9 January 2018
Metals
Update
| Sector:
Metals
Nalco
Neutral
BSE SENSEX
34,443
S&P CNX
10,637
CMP: INR86
Maintain Neutral
TP: INR81(-6%)
Coal price hike will shave off 4-5% earnings
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Financials Snapshot (INR b)
2017
2018E
Y/E MAR
79.3
93.1
Net Sales
10.8
14.8
EBITDA
6.4
9.1
PAT
3.7
4.6
EPS (INR)
37.9
24.8
Gr. (%)
52.8
55.3
BV/Sh(INR)
7.2
8.6
RoE (%)
7.9
11.3
RoCE (%)
23.1
18.5
P/E (x)
1.6
1.6
P/BV (x)
NACL IN
1,933
98 / 61
4/17/1
166.3
2.6
374
34.6
Coal price increase to impact EBITDA/PAT by 4%/5% for FY19E
We are lowering Nalco’s EBITDA by ~4% and PAT by ~5% for FY19E due to the
impact of the notified coal price increase by Coal India. Nalco has linkage coal
supply from Coal India’s Bharatpur coal mine that supplies G13 grade. The price
increase for G13 grade is INR120/ton.
Maintain Neutral
2019E
94.0
16.9
10.1
5.3
13.1
58.5
9.2
12.3
16.4
1.5
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
65.4
65.4
74.6
DII
18.2
19.1
12.9
FII
6.6
5.6
3.3
Others
9.8
10.0
9.2
FII Includes depository receipts
Stock Performance (1-year)
Natl. Aluminium
Sensex - Rebased
103
91
79
67
55
Nalco has access to captive bauxite resource and low-cost assured coal supply
from Coal India, driving significant raw material cost advantage. The
commissioning of the two captive coal blocks (Utkal D and E) will drive further
cost savings and improve supply of coal.
Aluminum smelter utilization is improving as availability of domestic coal has
increased and the outlook on LME has improved. We estimate aluminum
production to increase by ~11% YoY to 430kt in FY18 and reach full utilization
of ~460kt by FY20. Higher volumes will drive significant operating leverage
gains, given its high fixed cost base.
Nalco has a net long position of ~1.2-1.3mt in alumina. Alumina prices have
increased globally, driven by China’s supply-side and environment measures,
and disruption in supply of bauxite. Nalco is well placed to benefit from
improving alumina prices, given its low-cost captive bauxite and strong
logistics.
We are more bullish on LME due to the rising cost of production for smelters
globally and China’s supply-side measures. This should benefit integrated
players like Nalco.
We estimate EBITDA CAGR of ~25% over FY17-19 to INR16.9b, driven by higher
LME, volumes and operating leverage.
However, at CMP, the stock is fairly valued at 7.4x FY19E at LME of USD2,000/t.
We value the stock at 6.5x FY19E EV/EBITDA at INR81/share. Spot LME is
trading at USD2,250/t, an upside risk to our TP. Maintain
Neutral.
9 January 2018
17

Metals
Exhibit 9: Target price calculation
EBITDA
EV/EBITDA (x)
Target EV
add: CWIP
add: cash surplus
Equity Value
Target Price
FY17
10,797
6.5
70,177
5,660
35,473
111,310
FY18E
14,836
6.5
96,434
5,660
36,570
138,664
72
FY19E
FY20E
16,913
17,272
6.5
6.5
109,936
112,270
5,660
5,660
41,317
46,287
156,913
164,217
81
85
Source: MOSL, Company
9 January 2018
18

Metals
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2013
69,165
4.6
9,069
13.1
5,054
4,014
75
5,111
0
9,050
3,122
34.5
0
5,928
5,928
-31.5
2014
67,809
-2.0
9,342
13.8
5,247
4,095
0
5,577
-494
9,178
2,755
30.0
0
6,424
6,769
14.2
2015
73,828
8.9
17,060
23.1
4,137
12,924
0
6,726
1,484
21,134
7,916
37.5
0
13,219
12,290
81.6
2016
68,160
-7.7
9,380
13.8
4,241
5,140
12
5,366
535
11,028
3,718
33.7
0
7,310
6,956
-43.4
2017
79,329
16.4
10,796
13.6
4,804
5,993
0
4,083
-402
9,674
2,962
30.6
0
6,712
6,424
-7.6
2018E
93,094
17.4
14,836
15.9
4,602
10,233
0
3,019
0
13,252
4,214
31.8
0
9,038
9,147
42.4
2019E
94,027
1.0
16,913
18.0
4,662
12,251
0
2,814
0
15,065
4,917
32.6
0
10,148
10,148
10.9
(INR Million)
2020E
95,194
1.2
17,272
18.1
4,658
12,614
0
2,814
0
15,428
5,036
32.6
0
10,393
10,393
2.4
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2013
12,886
106,438
119,325
0
9,031
128,356
141,750
75,461
66,289
10,019
14,901
72,061
13,806
1,430
35,044
21,781
34,914
31,201
3,713
37,147
128,356
2014
12,886
108,338
121,225
0
9,101
130,326
148,581
80,662
67,919
7,687
12,450
77,428
11,737
2,436
40,483
22,773
35,159
31,505
3,655
42,269
130,326
2015
12,886
115,087
127,973
0
11,053
139,026
152,847
86,393
66,454
5,497
10
89,815
11,656
1,208
55,780
21,171
22,751
18,461
4,290
67,064
139,026
2016
12,886
116,191
129,077
0
11,101
140,178
155,035
90,360
64,675
6,614
11
93,891
11,270
2,352
58,095
22,173
25,012
20,001
5,011
68,878
140,178
2017
9,665
92,387
102,052
511
12,456
115,018
80,489
9,044
71,444
5,660
389
67,517
11,559
1,843
35,084
19,031
29,992
8,641
21,351
37,525
115,018
2018E
9,665
97,262
106,927
511
12,456
119,893
86,489
13,647
72,842
5,660
389
72,556
14,283
3,061
36,181
19,031
31,553
10,202
21,351
41,002
119,893
2019E
9,665
103,419
113,083
511
12,456
126,050
92,489
18,309
74,179
5,660
389
77,477
14,426
3,091
40,928
19,031
31,656
10,304
21,351
45,821
126,050
(INR Million)
2020E
9,665
109,820
119,484
511
12,456
132,451
98,489
22,968
75,521
5,660
389
82,664
14,605
3,130
45,898
19,031
31,783
10,432
21,351
50,881
132,451
9 January 2018
19

Metals
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2013
2.3
4.3
46.3
1.3
63.6
2014
2.6
4.5
47.0
1.5
70.4
2015
4.8
6.7
49.7
1.5
34.2
2016
2.7
4.5
50.1
1.8
74.0
31.9
19.2
1.7
2.4
17.5
2.0
2.2
5.4
7.5
6.7
0.9
0.5
13
60
-0.5
2017
3.7
6.4
52.8
2.8
60.5
23.1
13.5
1.6
1.7
12.2
3.3
7.4
7.2
7.9
8.0
0.9
0.7
9
56
-0.3
2018E
4.6
7.0
55.3
1.8
44.9
18.5
12.4
1.6
1.4
8.8
2.0
13.4
8.6
11.3
13.5
1.1
0.8
12
56
-0.3
2019E
5.3
7.7
58.5
1.8
40.0
16.4
11.2
1.5
1.3
7.4
2.0
16.2
9.2
12.3
15.6
1.1
0.7
12
56
-0.4
2020E
5.4
7.8
61.8
1.8
39.1
16.0
11.1
1.4
1.3
7.0
2.0
14.3
8.9
11.9
15.8
1.1
0.7
12
56
-0.4
1.5
18.0
5.0
7.2
5.8
0.8
0.5
8
73
-0.3
1.7
11.6
5.6
7.5
5.9
0.8
0.5
13
63
-0.3
1.7
12.3
9.9
14.6
17.5
0.9
0.5
6
58
-0.4
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2013
9,069
5,036
-726
-4,351
-266
8,762
-6,489
2,272
-7,358
731
-13,116
0
0
-75
-2,211
-2,285
-6,640
41,684
35,044
2014
9,342
5,083
3,379
-3,596
-4,395
9,813
-6,187
3,627
2,450
4,517
781
0
0
0
-5,155
-5,155
5,439
35,044
40,483
2015
17,060
8,211
-9,925
-4,915
-5,227
5,205
-3,031
2,173
12,440
5,749
15,157
0
0
0
-5,065
-5,065
15,297
40,483
55,780
2016
9,380
5,888
796
-3,614
-4,012
8,438
-5,456
2,982
-1
4,773
-683
0
0
-12
-5,427
-5,440
2,316
55,780
58,095
2017
10,796
3,646
4,931
-2,184
-2,830
14,359
-7,781
6,578
10,178
2,795
5,191
-28,407
511
-4
-8,259
-36,159
-16,608
51,692
35,084
2018E
14,836
2,848
-2,380
-4,214
9
11,098
-6,000
5,098
0
0
-6,000
0
0
-9
-3,991
-4,000
1,097
35,084
36,181
(INR Million)
2019E
16,913
2,814
-72
-4,917
0
14,739
-6,000
8,739
0
0
-6,000
0
0
0
-3,991
-3,991
4,747
36,181
40,928
2020E
17,272
2,814
-90
-5,036
0
14,961
-6,000
8,961
0
0
-6,000
0
0
0
-3,991
-3,991
4,970
40,928
45,898
9 January 2018
20

Metals
NOTES
9 January 2018
21

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Metals
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