13 November 2014
2QFY15 Results Update | Sector:
Metals
Hindalco
BSE SENSEX
27,941
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
8,358
HNDL IN
2,064.9
199/97
-1/-7/-43
CMP: INR152
n
TP: INR169
Buy
Strong India operating performance driven by alumina and copper
Hindalco’s standalone (S/A) reports strong results:
2QFY15 EBITDA increased
20% QoQ to INR9b driven by strong performance of copper segment. The
operating performance of aluminum segment improved a bit but not much as per
expectation, in view of the run-up in metal prices. Higher coal cost (e-auction
price), disruption of production at Hirakud and Aditya and annual wage
hikes/bonus prevented the benefit of aluminum prices to flow into margins.
Utkal Alumina’s production is improving
with 15% QoQ growth to 240kt.
Alumina production at old refinery was unchanged at 291kt. Long distance
conveyor (LDC) is expected to be commissioned soon. This will help Utkal to ramp
up production by 50% to full capacity of 1.5mtpa.
Adjusted PAT increased 22% QoQ
to INR4b. Reported PAT of INR788m included
an extraordinary item of INR4.3b for impairment of coal and copper mines, offset
by forex gains.
Novelis to post 8% EBITDA CAGR over FY14-17E:
Novelis recently reported an
EBITDA of USD230m, a little lower than estimate due to production issue at Pinda
(Brazil). Auto sales is picking up well. We expect Novelis’ EBITDA to post 8% CAGR
to USD1.12b over FY14-17E.
We maintain our positive stance
on Hindalco as it benefits from capacity ramp-
up, improving aluminum demand, LME, strong TC/RC and tailwind at Novelis.
Coal
block de-allocation is a drag, but an opportunity to secure coal as well:
While coal block de-allocation creates an overhang, we believe HNDL is well
placed to secure a coal block in the upcoming auction, given proximity of its asset.
Stock trades at FY16E EV/EBITDA of 7.1x. We value HNDL at INR169/share based
on SOTP. Maintain
Buy.
M.Cap. (INR b) / (USD b) 313.8/5.1
Financials & Valuation (INR Billion)
Y/E MAR
Net Sales
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
EV/EBITDA
( )
2015E 2016E 2017E
1,055.1 1,091.0 1,139.9
105.5
27.4
13.3
6.6
11.2
6.0
11.4
1.2
8.1
116.1
26.8
13.0
-2.1
10.1
6.6
11.7
1.1
7.1
121.3
34.6
16.8
28.9
11.8
7.1
9.1
1.0
6.4
n
n
n
n
n
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
Investors are advised to refer through disclosures made at the end of the Research Report.

Hindalco
Hindalco S/A performance driven by strong copper TcRc
n
n
n
Hindalco’s standalone (S/A) 2QFY15 EBITDA increased 20% QoQ to INR9b driven
by strong performance of copper segment. The operating performance of
aluminum segment improved a bit but not as much one would have expected in
view of run up in LME. Higher coal cost (E-auction price), disruption of
production at Hirakud and Aditya, and annual wage hikes/bonus prevented the
benefit of LME to flow into margins.
Utkal Alumina’s production is improving with 15% QoQ growth to 240kt.
Alumina production at old refinery was unchanged at 291kt. Long distance
conveyor (LDC) is expected to be commissioned soon. This will help Utkal to
ramp up production by 50% to full capacity of 1.5mtpa. Utkal’s financials are not
included here because it is a subsidiary.
Adjusted PAT increased 22% QoQ to INR4b. Reported PAT of INR788m included
extra-ordinary provisions of INR4.3b, which comprised of (a) Loss of INR 5.6b
was additional levy for coal extracted for cancelled coal block (b) Loss of INR2.6b
towards diminution in value of investment in Aditya Birla Minerals (c) Gain of
INR0.3b towards reversal of entry tax provision and (d) Gain of INR3.6b towards
exchange gain on receipt from A V Minerals return of capital.
Aluminum: cost inflation eroded realization gains
n
Aluminum production declined 2% QoQ(+34% YoY) to 187kt due to disruption at
Hirakud and Aditya. Metal production at Mahan smelter is gradually ramping up.
The capacity utilization has improved by 7 percentage point to 48%, while metal
production increased 16% QoQ to 43kt.
Production at Utkal was
15% higher QoQ
Exhibit 1: Alumina production grew 15% QoQ - kt
Source: MOSL, Company
n
n
n
n
The segment revenue increased 10% QoQ to INR33.2b as sales volumes
increased 4% QoQ to 184kt. Special grade alumina sales too increased 7% QoQ
to 80kt.
The primary metal realization increased 12% QoQ helped by 6% higher LME and
stronger spot premium. Alumina realization was resilient at ~INR30,000/t.
EBITDA increased 13% QoQ to INR4.6b. EBIDTA per ton increased 7% QoQ to
USD413/t. Higher coal cost (E-auction price), disruption of production at Hirakud
and Aditya smelter, and annual wage hikes/bonus together prevented the
benefit of higher aluminum prices to flow into margins.
EBIT increased 6% QoQ to INR3.4b. EBIT per ton increased just 1% QoQ due to
higher depreciation charges towards capitalization of new facilities.
2
13 November 2014

Hindalco
Metal production was
affected at Hirakud and
Aditya
Exhibit 2: Aluminum production (kt)
Source: MOSL, Company
Metal sales increased 4%
QoQ (+ 39% YoY). Share of
primary in sales mix
increased QoQ
Exhibit 3: Aluminum sales mix (kt)
Source: MOSL, Company
Stronger spot premiums are
helping Hindalco realize
better metal prices
Exhibit 4: Aluminum metal premiums (USD/t)
Source: MOSL, Company
Copper: strong performance driven by TcRc and byproducts
n
n
n
Copper production was strong at 96kt. Sales increased 2% QoQ to 96kt. Sales of
copper cathode increased 9% QoQ to 57kt, while sales of CC rods declined 6% to
39kt.
Copper EBITDA increased 28% QoQ to INR4.4b largely driven by stronger TcRc
and better by-product credits. DAP production double QoQ to 74kt.
EBIT per pound increased 26% QoQ (+43% YoY) to USc32/lb leading to strong
performance during the quarter.
13 November 2014
3

Hindalco
Smelter continues to
operate at production level
Exhibit 5: Copper production – kt
Source: MOSL, Company
Copper sale at 96kt was
better than our expectation
and grew 2% QoQ.
Exhibit 6: Copper sales - kt
Source: MOSL, Company
Copper TC/RC improved
amid global copper
oversupply. TC/RC in 2Q
was at USc20.8/lb as
against USc18.8/lb in
1QFY15.
Exhibit 7: Copper EBIT – Usc/lb
Source: MOSL, Company
13 November 2014
4

Hindalco
Novelis’ margins disappointed but outlook remains strong
Novelis’ 2QFY15 adjusted EBITDA increased 1% YoY to USD230m on 7% growth in
volumes as the benefit of capex has started to kick in. Margins disappointed as
EBITDA per ton declined 5% YoY to USD301/t. South America’s EBITDA/t
disappointed with 32% YoY (-27% QoQ) decline to USD353/t, which was largely
affected by operating cost inflation and production issue. Asian business too is
facing margin pressure, while European business is very resilient. North America is
improving in both volumes and margins, benefiting from new auto demand.
n
Net sales
grew 17% YoY (6% QoQ) to USD2.8b driven by both higher volumes
(+7% YoY) and increase in implied realization (+9% YoY)
n
Shipments
were 7% higher YoY (lower 1% QoQ) to 765kt, in line with our
estimate. Growth in North America (+4% QoQ) was more than offset by decline
in Europe (-5% QoQ) and Asia (-1% QoQ). South America shipments rose 2%
QoQ (+7% YoY) despite the difficult operating environment.
n
Adj. EBITDA/t
contracted 5% YoY (-1% QoQ) to USD301/t as benefit from higher
volumes were more than offset by impact of unabsorbed new facility fixed cost,
startup costs, and USD appreciation against Euro. Regionally, South America
EBITDA/t declined 32% YoY on production issue and cost inflation. North
America EBITDA/t was 14% higher QoQ. Adj EBIDTA came at USD230m, increase
of 1% YoY.
n
Expect positive FCF in FY15:
Net debt increased by USD86m QoQ to USD5.15b
due to an increase in working capital. Free cash flows (post capex) were
negative USD108m. Management is guiding for positive FCF (post capex) for
FY15 on significantly higher EBITDA in the second half and working capital
improvement.
n
Past the inflection point in EBITDA:
Novelis has crossed the inflection point in
EBITDA and cash flows as the strong demand from auto and increased benefit of
recycling will drive both volumes and margins. Volumes will increase 20%, while
the share of auto in product mix will grow from 9% in FY14 to 20% in FY17E.
n
Novelis to post 8% EBITDA CAGR over FY14-17E:
We expect Novelis’ EBITDA to
post 8% CAGR to USD1.12b over FY14-17E.
New asset fixed costs and
start up costs contributed
to USD52m inflation in
operating cost
Exhibit 8: EBITDA bridge (USD m)
Source: Novelis
13 November 2014
5

Hindalco
Exhibit 9:
EBITDA (USD m) grew 1% YoY…
Exhibit 10:
…driven by 7% volume, EBITDA/t shrank 5%
Source: MOSL, Company
n
Source: MOSL, Company
n
n
n
North America improving on expected line:
Shipments continue to improve (up
9% YoY). EBITDA per ton too has started to improve (+14% QoQ) as benefit of
auto volumes has started to kick in. Trial and testing of closed loop supply chain
with auto customer has already started. The Oswego facilities are expected to
be fully ramped latest by April 2015. The volume ramp up in 2HFY15 will depend
upon the production pick up at a auto customer end.
Europe is resilient:
Shipments increased 4% YoY to 234kt. EBITDA per ton
increased 18% YoY to USD321/t on benefit of recycling. Novelis commission
400ktpa advance recycling facilities during 1QFY15 at Nachterstedt, Germany.
Asia- volumes growing but margins are under pressure:
Shipments increased
robust 19% as the benefit of rolling mill expansion is being realized. The EBITDA
per ton continues to shrink on increased Chinese competition. Chinese
producers are able to source metal at lower cost due to underperformance of
SHFE v/s LME and stronger MJP spot premium.
Brazil – unusually low margins:
Brazil surprised with unusual shrinkage in
margins. The shipments continue to grow (+7% YoY). Novelis expects stronger
summer to drive volumes and EBITDA in 2HFY15.
Exhibit 11: South America (Brazil) EBITDA bridge (USDm)
Source: Novelis
13 November 2014
6

Hindalco
Exhibit 12:
shipments (kt) improving in N.Am. and Asia
Exhibit 13:
EBITDA (USD/t) was volatile in South America
Significant benefit from
close loop recycling with
auto customers
Source: MOSL, Company
Exhibit 14:
Scrap recycling to keep rising
Source: MOSL, Company
80%
39%
33%
FY10
FY12
43%
46%
50%
FY13
FY14
FY15
…
FY20
Source: MOSL, Company
With launch in F-150, and
production debottlenecking
at JLR, the auto volumes
will jump in 2HFY15
Exhibit 15:
Auto volumes to grow 2.8x in 3 years
Share in product mix
20%
15%
10%
5%
0%
FY14
FY15
FY16
FY17
9%
Kt (RHS)
20%
800
650
500
350
200
Source: MOSL, Company
Novelis’ capex cycle in now
behind. Capital allocation
will only be towards fast
growing auto segment &
recycling. Novelis has
committed to not allocate
further capital in Asia due
to intense competition
Exhibit 16: Capex (USDm) cycle has peaked
Source: MOSL, Company
13 November 2014
7

Hindalco
Exhibit 17: Net debt (USDm)
Novelis net debt increased
USD86m QoQ due to
increase in inventories.
Novelis still expects positive
free cash flows on full year
basis in FY15
Source: Company, MOSL
Operating cash flows have
shrunk for 2 consecutive
quarters due to repeated
increase in working
Exhibit 18: Operating cash flows after working capital change (USD m)
Source: Company, MOSL
Novelis has already paid
USD250m to parent
Hindalco as return of capital
in April 2014
Exhibit 19: EBITDA (USD m) has passed the inflection point
Source: Company, MOSL
13 November 2014
8

Hindalco
Hindalco: an investment profile
Company description
Hindalco is the largest aluminum producer in India with
total smelting capacity of 1.32mtpa. 603ktpa smelter is
in commercial operation, while 718ktpa smelters at
Mahan and Aditya are under trial production. 3mtpa
alumina refineries meet 80-85% of its bauxite
requirement from captive mines.
Novelis is the largest flat rolled producers in world with
3mtpa capacity and is spread over North America,
Brazil, Europe, and South Korea. Beverage cans’
consume ~60% of its output. Hindalco also has small
copper mines in Australia and operates 500ktpa, Asia’s
largest, copper smelter at Dahej .
Key investment risks
n
n
An unexpected fall in aluminum prices.
Outcome of coal block auction
Recent developments
n
Novelis announced price hike for auto segment.
Valuation and view
n
Key investment arguments
n
We continue to believe that peaking of capex and
improving cash flows will lead to deleveraging,
which will drive equity value. Stock is trading at
attractive cons. EV/EBTIDA of 7.1x (not adj. for
CWIP) and P/BV of 1.1x (BV adj. for goodwill).
Maintain
Buy.
n
Hindalco has invested USD6b in setting up
aluminum smelters (Mahan and Aditya) and Utkal
alumina refinery. Bauxite mines and alumina
refinery are already operational. Once coal mines
become operational, the cost of production at
718ktpa smelter will be lowest in world.
Novelis is likely to reap the benefit of USD2b
investment in recycling, auto sheet line and rolling
mills. Novelis is leading from front in new uses of
FRP in auto segment.
Sector view
n
We believe that aluminum demand will continue
to outperform global GDP growth, with a CAGR of
4-5% over the next 5-20 years. Notwithstanding
oversupply, we expect aluminum prices to
outperform other base metals due to rising cost of
production and bauxite supply disruption from
Indonesia (20-25% of global supply).
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
Hindalco
11.4
11.7
1.1
1.1
0.8
0.8
8.1
7.1
Nalco
10.9
9.7
1.2
1.1
1.1
0.9
4.7
3.6
SSLT
10.1
10.0
1.0
0.9
1.2
1.0
6.4
5.8
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY15
FY16
13.3
13.0
Consensus
Forecast
13.9
17.1
Variation
(%)
-4.6
-24.1
Target price and recommendation
Current
Price (INR)
152
Target
Price (INR)
169
Upside
(%)
11.2
Reco.
Buy
Shareholding pattern (%)
Sep-14
Promoter
DII
FII
Others
37.0
11.9
37.3
13.8
Jun-14
37.0
14.1
35.3
13.6
Sep-13
37.0
14.4
32.5
16.1
Stock performance (1-year)
Note: FII Includes depository receipts
13 November 2014
9

Hindalco
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 (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2014
877.0
9.4
82.9
9.4
35.5
47.3
27.0
10.2
-4.0
26.5
5.2
19.8
21.3
25.2
-22.2
0.5
25.7
2015E
1,055.1
20.3
105.5
10.0
39.5
66.0
40.5
10.2
-6.1
29.6
8.2
27.6
21.5
27.5
9.1
-0.1
27.4
(INR Billion)
2016E
1,091.0
3.4
116.1
10.6
43.6
72.5
44.7
9.1
0.0
37.0
10.0
27.1
27.0
27.0
-2.0
-0.1
26.8
2017E
1,139.9
4.5
121.3
10.6
44.2
77.1
40.9
10.3
0.0
46.5
11.8
25.4
34.7
34.7
28.8
-0.1
34.6
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
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2014
12.5
29.7
114.6
1.4
13.3
12.2
5.1
1.3
1.0
10.2
0.9
11.6
4.6
0.8
38.4
69.5
59.7
2.2
2015E
13.3
32.4
123.3
1.4
12.5
11.4
4.7
1.2
0.8
8.1
0.9
11.2
6.0
1.0
37.0
58.7
55.2
2.1
2016E
13.0
34.1
134.7
1.4
12.8
11.7
4.5
1.1
0.8
7.1
0.9
10.1
6.6
1.0
37.0
58.8
0.0
1.4
2017E
16.8
38.2
149.8
1.4
9.9
9.1
4.0
1.0
0.7
6.4
0.9
11.8
7.1
1.0
36.7
59.6
0.0
1.1
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
2014
2.1
404.0
406.0
647.0
31.9
1,102.7
748.9
267.4
481.6
230.6
23.4
475.0
166.9
92.3
117.1
98.6
277.3
130.0
147.3
197.8
1,102.7
2015E
2.1
422.0
424.0
631.9
31.9
1,105.9
916.1
306.9
609.2
124.2
23.5
470.6
169.7
107.0
95.2
98.6
291.0
143.7
147.3
179.6
1,105.9
(INR Billion)
2016E
2017E
2.1
2.1
445.4
476.7
447.5
478.7
604.9
540.9
33.9
37.0
1,104.7 1,075.3
1,027.1 1,052.1
350.5
394.7
676.7
657.4
48.7
53.2
23.7
23.9
482.3
474.8
175.9
186.0
110.5
114.7
97.3
75.5
98.6
98.6
296.0
303.4
148.7
156.1
147.3
147.3
186.3
171.4
1,104.7 1,075.3
E: MOSL Estimates
Cash flow statement
Y/E Mar
EBITDA
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2014
82.9
-9.6
9.6
78.1
-94.2
10.9
1.7
-81.7
16.3
48.7
-46.9
-3.1
14.9
11.4
105.8
117.1
2015E
105.5
-8.2
-3.7
87.5
-68.3
17.7
0.0
-50.6
0.0
-15.0
-40.5
-3.4
-58.9
-21.9
117.1
95.2
(INR Billion)
2016E
116.1
-8.0
-4.7
103.5
-35.5
9.1
0.0
-26.4
0.0
-27.0
-44.7
-3.4
-75.1
2.1
95.2
97.3
2017E
121.3
-8.7
-6.9
105.7
-29.6
10.3
0.0
-19.3
0.0
-64.0
-40.9
-3.4
-108.2
-21.8
97.3
75.5
13 November 2014
10

Hindalco
NOTES
13 November 2014
11

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Hindalco
inducement to
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