Accumulate Hindalco Industries; target of Rs 154: Emkay

“Hindalco Industries, Novelis to remain the key growth driver with an EBITDA of more than US$1 bn, largely immune to LME. Successful debt refinancing to address concerns on cons. balance sheet. First quartile unit cost of production of domestic aluminium business to ensure profitability even at tough times. Threefold 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 business would help mitigating commodity risk to a large extent. Stability in Novelis with capex driven growth and attractive valuations should outplay short- term concerns. 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.”

“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.”

“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. 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,” says Emkay Global Financial Services research report.

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