Sell Hindalco Industries
Published on Tuesday, November 10th, 2009 at 11:34 AMAuthor: insightt95in (169 Articles)
Hindalco Industries
Sell
Price: Rs 126 Target Price (Mar 11): Rs 92
Not out of the woods…yet
* Non ferrous play – Hindalco is the domestic industry leader in aluminium
and copper with 39% market share for aluminium and 48% market share
for copper in FY09 in India. Acquisition of Novelis for ~USD 6 bn, a downstream
aluminium rolling business, catapulted the company to the position
of a global leader in aluminium rolled products with ~19% global share.
* Integrated aluminium domestic operations marred by weak price
outlook- Hindalco’s 488ktpa aluminum operations is backward integrated
with its bauxite & coal mines and captive power plants to meet 100% of its
power requirements. Poor execution track record (delays of ~2 years) and
back ended project expansions (material benefits only by FY14) would
further dilute return ratios.
* Aluminium outlook concern in the short term: Historically high level of
aluminum inventories (~17% of annual global consumption), tepid Chinese
consumption (decline of ~1% YTD v/s growth of ~40% in FY07) and
~4mton of excess capacities in China will cap meaningful upsides to price
from the current levels.
* Novelis to continue to be a drag- Shipments are unlikely to recover
significantly over the short term due to exposure to North America &
Europe. Conversion margins would remain subdued due to the highly
competitive aluminium rolling business.
* Highly leveraged; expensive valuations – At net debt to EBITDA ratio
of 4.1x FY11E and debt equity ratio of 2x, the company has a debt of
Rs283b. At 7.4% RoCE FY11E, the company is not even earning its cost of
capital. We value the stock at Rs92/share based on our SOTP valuation.
Aluminium price is the main risk to our call. We initiate coverage with a
SELL rating.
Investment highlights
Hindalco, the flagship metals company of the Aditya Birla Group, is the
domestic industry leader in aluminium and copper. The company currently has
488ktpa of integrated aluminium capacity and 500ktpa of copper smelting
capacity. The company had 39% market share for aluminium and 48% market
share for copper in FY09 in India. Acquisition of Novelis, a down-stream
aluminium rolling business, catapulted the company to the position of a global
leader in aluminium rolled products. Hindalco’s copper plant at Dahej in
Gujarat, produces world class copper cathodes, continuous cast copper rods
and precious metals, with ~23% of material linkages coming from two copper
mines (Nifty and Mt Gordon) in Queensland and NSW, Australia under Aditya
Birla Minerals (51% subsidiary of Hindalco).
Key Risks
The profitability and operations of Hindalco are subject to risks from sharp
volatility in aluminium prices on the LME and higher than expected rupee
appreciation. Any exposure to these risks can adversely impact the overall
operations of the company.
Valuations
The stock stays highly leveraged, with ~Rs283b debt (higher than current
market cap) in consolidated books in FY09. The company came up with a
highly dilutive rights issue (40% dilution) of Rs50bn in September 2008 to pay
down bridge loans (AV Minerals) of ~US$3bn. Hindalco Board has further
approved raising of long term finance by way of QIP/GDRS upto Rs. 29b. At
net debt to EBITDA ratio of 4.1x FY11E and debt equity ratio of 2x, the
company has a debt of Rs283b. The stock trades at 1.3x P/B, RoE of 8.6%
FY10E and 1.1x P/B, RoE of 10% FY11E. At 7.4% RoCE FY11E, the company is
not even earning its cost of capital. We value the stock at Rs92/share based
on our SOTP valuation. Aluminium price is the main risk to our call. We initiate
coverage with a SELL rating.
Note: More intra-day opportunities will be provided
live during the market hours
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