Wednesday 6 February 2008

Multibagger - HINDALCO

Hindalco is on a massive expansion plan in its aluminium business with capacities increasing 3x over the next 3-4 years. The company has announced expansion projects, both greenfield and brownfield increasing its aluminium capacity to 1.5 million tons. Most of the large projects are likely to go on stream only after FY09.

Hindalco Industries Ltd

Aluminium capacity to boost revenues

Hindalco is on a massive expansion plan in its aluminium business with capacities increasing 3x over the next 3-4 years. The company has announced expansion projects, both greenfield and brownfield increasing its aluminium capacity to 1.5 million tons. Most of the large projects are likely to go on stream only after FY09. These expansions provide high growth visibility over the longer run. Further, with captive access to coal reserves, Hindalco's cost competitiveness is expected to improve further. We expect aluminium prices to stay around the current levels of $ 2,300-2,600 in the near term.

Shareholding pattern:

As on 30th September 2007 Holding (%) No of Shares (in Lacs)
Promoter 31.4 3,856
Non Promoter Corporate Holding 10.4 1,258
FIIs & Institutions 39.9 4,902
Public & Others 18.3 2,254

Novelis acquisition leads to forward integration of aluminium division

Acquisition of Novelis gives Hindalco an instant access to world class technology for rolled products. Novelis follows a pure conversion model and operates in a segment that demands stringent customer qualification standards along with high capital outlay and longer lead time. With Novelis, Hindalco would have access to regular cash flows because Novelis business model is pass through business i.e. its sales realizations are not affected by volatility in LME prices. This acquisition would give Hindalco regularity in its cash flows.

Copper business to generate a steady cash flows

Hindalco's Birla copper unit at Dahej is the world's largest single location custom copper smelter with smelting capacity at 0.5mn tons. The plant is backed by captive power plants, oxygen plants as also by product facilities for fertilisers and precious metals. Though Tc/Rc margins are subdued currently, going forward we expect the company will be in a position to charge higher margins from the current levels.

Financials:

March (Rs Cr) FY06 FY07 FY08E FY09E
Revenues 12,120.00 19,316.00 64,214.00 61,264.00
Operating Profit 3,127.00 4,839.00 6,201.00 5,892.00
OPM (%) 25.80 25.10 9.60 9.60
Net Profit 1,588.00 2,702.00 2,156.00 1,895.00
Equity 98.60 104.40 130.70 130.70
EPS (Rs) 16.10 25.90 16.50 14.50

Valuation and recommendation:

We have valued Hindalco based on EV/EBITDA multiple on aluminium and copper business as also for Novelis. The stock is trading at a discount to its peers, i.e. NALCO and MALCO. We expect the stock to consolidate in the near term, and may gain as its capacities start production. On a sum of parts valuation method, we recommend a BUY with a target of Rs 220.

Company Background:

Hindalco Industries, a flagship company of the Aditya Birla Group is the largest aluminium producer in India, with a market share of 45% and is the only player that converts 67% of metal production into value-added products including high-end products like aluminium foils and packaging material. Copper smelting capacity of 500ktpa is the largest in Asia.

Disclaimer:

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