Initiating Coverage - Hindalco Industries (Hold): Production at inflection point... ICICIdirect

Hindalco (Aditya Birla Group) is a metal major with business interests in copper smelting & aluminium manufacturing domestically. It is also a leading aluminium converter globally through subsidiary Novelis. On the domestic aluminium business front, the company is undergoing an ambitious capacity expansion wherein its aluminium (primary metal) production capacity will increase from 560 KT currently to 1278 KT by FY15E. The planned capacity expansion is backed by corresponding alumina refinery with captive bauxite linkage. With trial runs & commissioning at an advanced stage, we expect domestic aluminium metal production to grow at 11.2% CAGR in FY13-16E. On a consolidated basis, the topline and EBITDA are poised to grow at a CAGR of 6.5% and 8.8%, respectively, in FY13-16E. However, high debt on its books (gross debt FY13: Rs. 56,906 crore) continues to weigh on the valuation front (core business quoting at 7.1x FY16E EV/EBITDA). We initiate coverage on Hindalco with a HOLD rating & a target price of Rs. 108.

Novelis: Stable performance; improving product mix to aid EBITDA margins!!

Novelis is one of the world's leading aluminium rolling and recycling companies supplying premium products in the markets of North America, Europe, Asia and South America. The company is the largest single producer of aluminium rolled products with an estimated share of 14% of the world's supply. Novelis' sales volumes are expected to grow at a CAGR of 5.7% in FY13-16E. On the back of increasing share of the automobile segment in the overall sales mix, we expect the EBITDA/tonne to improve from US$336/tonne in FY13 to US$360/tonne by FY16E.

Mahan Smelter: ramp up progressing well; Aditya: first metal tapped

The company has commissioned the Mahan aluminium smelter (capacity 359 KT, 900 MW) with first metal tapped in Q1FY14 and is ramping up the same for commercial production. The company has also tapped first metal at its Aditya smelter (capacity 359 KT, 900 MW). However, commercial production from this smelter is expected only in H2FY15. To feed the abovementioned smelters, Hindalco has also commissioned its Utkal alumina refinery (capacity 1.5 MTPA) and is ramping up the same.

Mahan coal block - still distant; high debt weighs!!

The company has received stage-2 forest clearance for its Mahan coal block subject to certain conditions. The next important step would be signing of liming lease with the state government and subsequent mine development, which is likely to take ~18-24 months. High debt on the books continues to weigh on valuations (core business quoting at 7.1x FY16E EV/EBITDA) though the same is expected to decline from FY16E onwards. We have valued the company on an SOTP basis, thereby arriving at a target price of Rs. 108. We initiate coverage with HOLD rating.

Source : Equity Bulls

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