Hindalco - Project commissioning to be the key driver - Emkay

We met the Hindalco management to understand the recent development with respect to existing operations and various ongoing projects. Following are the major takeaways:

- Volume is likely to remain lower in Hirakud during FY13, as the power plant remains closed following the order of the State Pollution Control Board due to a breach in the ash pond that overflowed into the agricultural land. We believe the cost would also remain high due to purchase of power from the grid.

- The brownfield expansion in Hirakud is likely to come on stream in FY14; Relocation of Rogerstone facility is underway; Renukoot has been producing at normal capacity.

- Mahan smelter commissioning likely to start in December 2012 with 40 pots within 3 months; after that 1 pot each day is likely to be commissioned; management expects ~45% contribution from Mahan Aluminium in FY14. The company has spent Rs 70 bn so far and is hopeful about positive outcome wrt Mahan Coal block.

- Utkal refinery is likely to be commissioned during Q1FY14. The conveyor belt from mine to refinery however is delayed. The company plans to transport bauxite through trucks and is hopeful to produce 350-400 kt alumina. Total capex has been Rs 45 bn

- Aditya aluminium project is likely to get commissioned during H2CY2013. The company has so far incurred Rs 70 bn on this project. The company recently tied up debt of Rs 98.96 bn. The total project cost escalated to Rs 131.95 bn mainly due rise in IDC. The company has applied for stage-I clearance for the coal block.

- Novelis volume is likely to be steady within 3 mt; meaningful incremental volume is likely to be visible in FY15.

- Problems at copper smelter at Dahej has been resolved and it is operating at normal capacity now; The management has indicated the present TcRc at USc16- 16.5/ lb.

- FY13 capex seen at Rs 80- 90 bn; present CWIP stands at Rs 210 bn (Mahan - Rs 85 bn, Utkal - Rs 50 bn and Aditya - Rs 60 bn).

Valuation

We believe, the volume guidance for FY14 seems little bit optimistic. Overall, FY13 volume is expected to remain subdued and some improvement to be seen in FY14, which is factored in our estimates. At this point we keep our volume estimate unchanged for both FY13 and FY14. We have however, revised our debt assumptions and accordingly fixed costs for the company for both FY13 and FY14. Interest capitalization would take place in proportion to the commissioning of the projects, which can be a concern initially. With the revised assumptions we continue to value the company on SOTP basis (Novelis at 6xFY14 EV/ EBITDA, domestic business at 5.5XFY14 EV/ EBITDA). While, we maintain our Buy rating on the stock we reduce our target price to Rs 134/ share. While, smooth commissioning of all the projects along with timely clearance for Mahan coal block would have an upside risk, any further delay in projects and further fall in aluminium LME would pose downside risks to our estimates.

Source : Equity Bulls

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