Angel Broking recommends Neutral on Hindalco

We met the Management of Hindalco Industries (Hindalco) to get an update on the company's operations and expansion projects. The key takeaways from the interaction are:

Production to ramp up from Utkal and Mahan projects: The company aims to produce 300-350kt of alumina from Utkal refinery (1.5mtpa alumina refinery) in FY2014 and 1mn tonne in FY2015. In case of Mahan smelter (359ktpa aluminium smelter), the company aims to produce 50-60kt in FY2014 and over 200kt of aluminium in FY2015.

Cost guidance for Utkal and Mahan: The company expects the cost of production of alumina at the Utkal refinery to be at US$180/tonne when the plant ramps up at near-full utilization levels. The grade of bauxite available for the Utkal refinery is 42% alumina content and it has low silica content, thus requiring lower consumption of caustic soda compared to its existing alumina operations. The cost of aluminium production from Mahan smelter is estimated to be US$1,600/tonne without using captive coal. The company stated it is likely to use a blend of e-auction and Indonesian coal for the 900MW CPP (captive power plant) at Mahan smelter until captive coal is available from Mahan coal block. The trial run of Aditya smelter is likely to complete by end of FY2014.

Company approaching near-end of capex cycle at its India operations: The capex guidance for FY2014 is Rs. 6,000cr (incurred during 1HFY2014 - Rs. 3,000cr) and for FY2015 it's Rs. 3,000cr for its Indian operations. The total project cost for Utkal refinery, Mahan smelter and Aditya smelter is estimated to be Rs. 8,000cr, Rs. 11,000cr and Rs. 12,000cr, respectively. Currently, the company has kept its Jharkhand aluminium project (359ktpa aluminium smelter) and Aditya refinery (1.5mtpa alumina refinery) plans on hold.

Debt levels likely to decline: The company states that it's consolidated debt is likely to decline post FY2015, if not from FY2015 as it does not have any major capex plans from FY2015. Also, debt repayments could start from FY2015 as it starts generating cash flows from newly expanded projects.

Novelis to focus on auto-grade markets: For Novelis, the company aims to shift its focus on auto-markets from the currently existing beverage can markets. Auto products enjoy higher premiums compared to commoditized beverage can products. Novelis' capacity (aluminium-conversion) at the end of FY2015 is estimated to increase to 3.7mn tonne from 3.0mn tonne in FY2013.

Outlook and valuation: Although Hindalco has expanded its aluminium capacity recently, low aluminium prices, sticky costs, delay in commencement of mining from captive blocks and higher interest and depreciation costs are expected to mute its profitability growth. In the near-term, there is lack of clarity over production from the Mahan coal block for its Mahan smelter. Without captive coal block, the Mahan smelter is expected to face cost pressures, resulting in lower return ratios over FY2013-15. Hence, we recommend a Neutral rating on the stock.

Source : Equity Bulls

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