Buy Hindalco; target of Rs 161: Motilal Oswal

Motilal Oswal is bullish on Hindalco Industries and has recommended buy rating on the stock with a target of Rs 161 in its October 1, 2012 research report.

“Hindalco remains focused on capex with planned spend of INR90b on Indian projects (despite low IRR at current LME) and another USD600-700m at Novelis in FY13. Over FY14-15, another INR80b will be spent in India and USD450m at Novelis.  We believe that the total group level annual capex will peak in FY13 at INR130b. For FY14, the figure is expected to be nearly half at INR68b. Since most of the capex at Novelis will be completed in FY14, there is possibility of dividend in FY15.  Mahan smelter (359ktpa aluminum) is expected to start production in December 2012 with 40 pots. The metal production target for FY14 is 140kt. Alumina will be sourced from Utkal project. The captive power plants will use coal from e-auctions and imports.  Utkal Alumina (1.5mtpa alumina refinery) is expected to complete mechanical commissioning by December 2012 and the commercial production is expected to start in 1QFY14. Alumina production is expected to be 400kt in FY14.The 22km road to the bauxite mines is ready. The conveyor with capex of INR10b will be completed later. Bauxite mining is expected to start by March 2013. INR44b out of the total project cost of INR72b has already been spent.”

“As per our calculations, the IRR of Mahan and Aditya smelter is low at 6.6% and 5.5%, respectively, at LME of USD2,100/tom. As a result, the NPV of these projects is -INR62b and -INR87b, respectively, assuming that the coal will be purchased at market price. Utkal Alumina has positive NPV of INR4b assuming that the bauxite will be available from captive mines. The implied value of CWIP is at discount of INR136b (INR229b of estimated CWIP at the end of FY14). This implies that current valuations are already factoring in much of the future possible value destruction. 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 quarters. The expansion of capacity to 213kt and the relocated FRP facilities are expected to be commissioned by end of FY13. Copper smelter's is expected to bounce back in 2QFY13 with improved production. Aluminum demand remains strong in India and high physical spot premiums are helping margins.”

“We expect Hindalco's consolidated EBITDA to increase 14% YoY to INR100.8b in FY14 driven by (1) 28% growth in primary aluminum production to 700kt and 36% growth in alumina production to 1.9mt in India, and (2) 6% growth in volume at Novelis. FY14 EPS growth, however, will be lower at 9% to INR20.6 due to higher interest and depreciation charge. We believe Hindalco stock offers best risk adjusted returns for long-term investors although the investments in greenfield projects have low IRR currently. Any run-up in LME for aluminum will drive up short-term stock prices as well. Current stock price is Hindalco 1 October 2012 3 already factoring low LME for aluminum and all the future value destruction from greenfield projects. Currently, ~70% of cash flows arise from its conversion business, which is fairly insulated from LME volatility. We value Hindalco at Rs161 using SOTP: (1) 5.5x EV/EBTIDA for earnings from operating assets, and (2) 72% value for unfinished capex because average IRR on CWIP is 7.2% v/s 10% WACC. Maintain buy,” says Motilal Oswal research report.

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