Maintain Buy on Hindalco Industries - Motilal Oswal

Hindalco's (HNDL IN, Mkt Cap US$8.9b, CMP200, Buy)

Hindalco wholly owned subsidiary Novelis intends to raise US$4b (US$2.5b of senior notes + US$1.5b of secured term loan) to refinance US$1.124b 7.25% Senior Notes due 2015 and US$185m 11.5% Senior Notes due 2015 pursuant to recently announced tender offers as well as its US$1.125b term loan facility due 2014.

Hindalco will use US$1.7b to replace ~US$982m acquisition debt in Netherland SPV and part finance greenfield projects in India. Hindalco is currently implementing US$5b capex in India.

We expect overall interest costs to come down depending upon terms of new debt. Currently, average cost of debt for Novelis is ~6%. Every 100bp reduction in interest cost will result in FY12 EPS upgrade of ~2%. Hindalco has recently faced some problem in Jharkhand in transporting bauxite to Muri (450ktpa) refinery due to naxal activities, which may affect alumina production to some extent. This may be a one off situation. The stock is trading at PE of 10.2x FY12 and EV/EBITDA of 5.8x FY12. Maintain Buy.

Source : Equity Bulls

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