hindalco industries - nirmal bang industries.pdfhindalco industries cmp: rs108 ... the mahan project...

Institutional Equities 1

Hindalco Industries

CMP: Rs108

Rating: Sell

Market Capitalisation: Rs225bn (US$3.45bn)

Target Price: Rs80

Institutional Equities

Key arguments for Sell rating

2

Global aluminium capacity utilisation at 75% is one of the lowest in the past 8 years

User industries like Auto, Housing and Construction - facing tough challenges

China’s aluminium production growth in the western region, with abundance of coal, can jeopardise the global market

Global inventory at all-time high of over 12mt leads to an overhang on aluminium prices

We are assuming LME aluminium price of US$1,850/tn in FY15E and US$1,880/tn in FY16E

We have valued CWIP at a 30% discount due to low return ratios and investments in group companies have been valued at 50%, in line with holding company discount

We have considered long-term employee provision as debt in our EV/EBITDA calculations


China may shock with capacity addition

3

65

70

75

80

85

90

95

15

25

35

45

55

65

75

CY05 CY07 CY09 CY11 CY13E CY15E CY17E

Aluminium Capacity Aluminium Production Capacity Utilisation - RHS

(%)(mt)

• The improvement visible in capacity utilisation during CY15-CY17 is primarily due to little known capacity

addition, but as witnessed in the past, China can surprise with capacity addition, primarily in western

China, driven by lower power tariff

• Aluminium industry’s capacity utlisation at 75% in CY12, one of the lowest in the past 8 years

Source: Crisil Research


Key assumptions on Hindalco

4

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E FY2016E

Aluminium Production

Existing 523,453 555,404 537,935 574,076 541,000 558,046 557,040 557,040

Mahan - - - - - 40,000 120,000 173,875

Hirakud - - - - - 14,300 36,400 46,150

Aditya - - - - - - 60,000 140,000

Total 523,453 555,404 537,935 574,076 541,000 612,346 773,440 917,065

Alumina Production

Existing 1,237,284 1,307,323 1,352,877 1,355,056 1,319,000 1,386,750 1,402,500 1,402,500

Utkal - - - - - 206,250 806,250 1,143,750

Total 1,237,284 1,307,323 1,352,877 1,355,056 1,319,000 1,593,000 2,208,750 2,546,250

Aluminium Price 5,887 6,109 8,134 8,488 7,857 6,840 6,500 6,500

Copper Price 2,235 1,868 2,257 2,319 1,976 1,823 1,850 1,880

USD/INR 46.0 47.4 45.6 48.0 54.4 64.0 * 64.0 62.0

Standalone Financials

Net Sales 182,197 195,363 238,592 265,968 260,569 300,925 337,350 350,589

EBITDA 30,359 29,499 31,854 31,160 22,037 30,958 37,256 35,633

PAT 22,303 19,156 21,369 22,372 16,992 19,022 7,554 (5,049)

Novelis Key Assumption

Novelis Volume (mt) 2.9 2.9 3.1 3.0 2.9 3.0 3.2 3.3

Novelis Adjusted EBITDA/tn 177 278 361 371 345 314 318 324

Adjusted EBITDA (US$mn) 489 754 1,071 1,053 961 897 960 1,030

Other Major Subsidiaries EBITDA (Rsmn)

Aditya Birla Minerals (2,365) 4,539 5,737 4,138 2,780 159 (141) 561

Aditya Birla Chemicals 744 764 810 1,629 1,997 2,281 2,364 2,275

Consolidated Financials (Rsmn)

Net Sales 659,630 607,079 722,023 808,214 801,928 916,482 992,909 1,025,653

EBITDA 55,229 85,865 79,287 81,894 78,368 91,608 103,858 105,432

PAT 4,839 39,255 24,564 33,970 30,269 31,372 24,026 15,051

EPS 2.8 20.5 12.8 17.7 15.8 15.2 11.6 7.3

* House-view still under consideration; Source: Company, Nirmal Bang Institutional Equities Research


Expansion set to be value destructive

5

Global aluminium industry has gone through a major transformation in

the past couple of quarters, where prices have dropped to an average

US$400-500/tn on a sustainable basis, while costs have risen by

US$300-400/tn on structural basis

As usual, large capacity expansion was conceived at the peak of the

aluminium cycle

Policy paralysis in domestic market has worked as ‘nail in the coffin’

Hindalco has already witnessed a delay of more than 18-24 months on

key projects, which has weakened its balance sheet considerably


Accumulated interest increasing balance sheet risk

6

In view of low aluminium prices and absence of raw material linkage,

Hindalco has been delaying project commissioning

This has led to a sharp rise in interest capitalisation in the past two

years

15,000

21,000

27,000

33,000

39,000

45,000

-

3,000

6,000

9,000

12,000

15,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13

Capitalized Interest Net Interest Cost Standalone EBITDA - RHS

(Rsmn) (Rsmn)

40,000

46,000

52,000

58,000

64,000

70,000

76,000

82,000

88,000

-

5,000

10,000

15,000

20,000

25,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13

Capitalized Interest Net Interest Cost Consolidated EBITDA - RHS

(Rsmn) (Rsmn)

Source: Company, Nirmal Bang Institutional Equities Research


Mahan and Aditya projects’ potential returns below

cost of equity at full integration level as well

7

At the peak integration level (assuming 100% coal supply from captive resources), the Mahan project is likely to report a RoCE of 4.6% and a negative RoE of 1.7%

Similarly, the RoCE and RoE of Aditya Aluminium would stand at 5% and a negative 0.2%, considering 100% coal sourcing

100% coal sourcing would not be possible in the initial years, as the ramp-up to 8.5mt would take 18-24 months after the first coal output

Mahan Coal is a 50:50 JV with Essar Power, which has a 60% off-take right

In this case, the company would have to rely on costlier e-auctioned and imported coal


Mahan’s financials- RoCE and RoE in focus

8

Without Captive coal With Captive Coal

FY14E FY15E FY16E FY14E FY15E FY16E

Peak Capacity with

proporationate share of

Captive coal

Peak Capacity

with fully Captive

coal

Mahan Financials

Volume (tonne) 40,000 120,000 173,875 40,000 120,000 173,875 359,000 359,000

Realisation (Rs/tn) 130,641.3 130,240.0 125,884.8 130,641.3 130,240.0 125,884.8 125,884.8 125,884.8

Revenue (Rsmn) 5,225.7 15,628.8 21,888.2 5,225.7 15,628.8 21,888.2 45,192.6 45,192.6

Alumina costs (Rsmn) 1,156.0 3,468.0 5,025.0 1,156.0 3,468.0 5,025.0 10,375.1 10,375.1

Total power costs (Rsmn) 2,429.6 7,288.9 10,295.3 1,933.9 5,801.8 8,140.5 16,807.7 12,358.6

Carbon costs (Rsmn) 639.9 1,920.0 2,695.1 639.9 1,920.0 2,695.1 5,564.5 5,564.5

Other expenses (Rsmn) 360.0 1,080.0 1,564.9 360.0 1,080.0 1,564.9 3,231.0 3,231.0

Total costs 4,585.5 13,756.9 19,580.2 4,089.8 12,269.8 17,425.4 35,978.3 31,529.2

EBITDA (Rsmn) 640.1 1,871.9 2,308.0 1,135.8 3,359.0 4,462.8 9,214.4 13,663.5

EBITDA Margin 12.2 12.0 10.5 21.7 21.5 20.4 20.4 30.2

EBITDA (US$/tn) 250.1 243.7 214.1 443.8 437.4 414.0 414.0 613.9

Depreciation 640.7 1,922.0 2,784.9 640.7 1,922.0 2,784.9 5,750.0 5,750.0

PBIT (0.6) (50.1) (476.9) 495.2 1,437.0 1,677.9 3,464.4 7,913.5

Interest costs 966.0 2,898.1 4,199.2 966.0 2,898.1 4,199.2 8,670.0 8,670.0

PBT (966.6) (2,948.2) (4,676.1) (470.9) (1,461.0) (2,521.2) (5,205.6) (756.5)

Taxes (321.9) (981.7) (1,557.1) (156.8) (486.5) (839.6) (1,733.5) (251.9)

PAT (644.7) (1,966.4) (3,118.9) (314.1) (974.5) (1,681.7) (3,472.1) (504.6)

RoCE (%) 0.0% 0.0% -0.3% 0.3% 0.8% 1.0% 2.0% 4.6%

RoE (%) -2.1% -6.6% -10.4% -1.0% -3.2% -5.6% -11.6% -1.7%



Aditya Aluminium financials - RoCE and RoE in focus

9

Without Captive coal With Captive Coal

FY14E FY15E FY16E FY14E FY15E FY16E Peak Capacity without

Captive coal

Peak Capacity

with Captive coal

Aditya Aluminium Financials

Volume (tonne) - 60,000 140,000 - 60,000 140,000 359,000 359,000

Realisation (Rs/tn) 130,641.3 130,240.0 125,884.8 130,641.3 130,240.0 125,884.8 125,884.8 125,884.8

Revenue (Rsmn) - 7,814.4 17,623.9 - 7,814.4 17,623.9 45,192.6 45,192.6

Alumina costs (Rsmn) - 1,620.0 3,780.0 - 1,620.0 3,780.0 9,693.0 9,693.0

Total power costs (Rsmn) - 3,644.5 8,289.5 - 2,900.9 6,554.5 16,807.7 12,358.6

Carbon costs (Rsmn) - 960.0 2,170.0 - 960.0 2,170.0 5,564.5 5,564.5

Other expenses (Rsmn) - 540.0 1,260.0 - 540.0 1,260.0 3,231.0 3,231.0

Total costs - 6,764.5 15,499.5 - 6,020.9 13,764.5 35,296.2 30,847.1

EBITDA (Rsmn) - 1,049.9 2,124.3 - 1,793.5 3,859.4 9,896.5 14,345.6

EBITDA Margin - 13.4 12.1 - 23.0 21.9 21.9 31.7

EBITDA (US$/tn) - 273.4 244.7 - 467.1 444.6 444.6 644.5

Depreciation - 1,044.6 2,437.3 - 961.0 2,242.3 6,250.0 6,250.0

PBIT - 5.4 (313.0) - 832.5 1,617.0 3,646.5 8,095.6

Interest costs - 1,534.3 3,579.9 - 1,449.0 3,381.1 9,180.0 9,180.0

PBT - (1,528.9) (3,892.9) - (616.5) (1,764.0) (5,533.5) (1,084.4)

Taxes - (509.1) (1,296.3) - (205.3) (587.4) (1,842.7) (361.1)

PAT - (1,019.8) (2,596.6) - (411.2) (1,176.6) (3,690.9) (723.3)

RoCE 0.0% 0.0% -0.2% 0.0% 0.4% 0.8% 1.9% 4.3%

RoE 0.0% -2.9% -7.4% 0.0% -1.5% -4.1% -10.5% -2.1%



Cash utilisation policy is questionable

10

We are very surprised by the kind of investments that Hindalco has made in the past

one year

In its quest for higher returns, the company has started making investments in non-

convertible debentures of companies and financial bodies like Rallis India, Sundaram

Finance, MTNL, LIC Housing Finance, Bajaj Auto Finance, Cholamandalam Inv. Fin.

Co, HDB Financial Service and Tourism Finance Corporation

The company’s cash surplus gone up from Rs53bn to Rs79bn in the past one year,

while debt has also gone up from Rs146bn to Rs245bn in the same period

The management believes that maintaining a large reserve ratio would help to

overcome any liquidity crisis in the domestic market (although, the question remains

– how much?)

However, we have observed that the above stated objective would not be fulfilled

considering large investment in illiquid assets


Novelis’ investment philosophy not clear

11

The company invested US$325mn in its Pinda facility in Brazil in

order to increase aluminium rolling capacity by 200,000tn

However, our interaction with the management revealed that the

market’s current absorption capacity is only 50,000-60,000tn

The management is hoping for strong demand in 2014 Football

World Cup and 2016 Olympics (however, these are one-time events

and don’t result in sustainable demand)

We expect this facility to achieve peak production in FY18-FY19

At peak capacity, the company would generate RoCE of 9% and

RoE of 15%


50% discount to investment in group companies

12

Hindalco has a 6.89% stake in Idea

Cellular, valued at Rs36.6bn at last

closing price

The company has investments in other

group companies (UltraTech, Grasim,

Aditya Birla Nuvo) valued at Rs18.4bn

As visible in holding companies’

valuations, standalone holding

companies trade at a discount of 86%

on an average

We have valued these investment at a

50% discount, since we see that

possibility of stake getting monetised at

appropriate time

40

55

70

85

100

McDowell Hold

U B Holdings Hexa Tradex HB Stockholding

Vardhman Hold

JSW Holdings

Nalwa Sons

(%)

Source: Capitaline


Dichotomy in valuation parameters

13

As usually visible in most commodity stocks, the valuation multiple during trough period starts expanding due

to low earnings, which is fairly visible in Hindalco with its stock trading at EV/EBITDA of over 1 standard

deviation

However, the pain is fairly visible with the price to book value multiple being near to the lowest level witnessed

in the past 10 years

This fairly captures the deterioration in return ratios over the period FY10-FY16

P/BV chart EV/EBITDA chart

0.0

2.0

4.0

6.0

8.0

10.0

Apr-03 Jan-05 Nov-06 Sep-08 Jun-10 Apr-12

EV/EBITDA Median EV/EBITDA Med +1SD

Med +2SD Med -1SD Med -2SD

(x)

-

0.5

1.0

1.5

2.0

Apr-03 Jan-05 Nov-06 Sep-08 Jun-10 Apr-12

EV/EBITDA Avg Avg + SD Ag + 2SD Avg - Std Ag - 2SD

(x)

Source: Bloomberg, Nirmal Bang Institutional Equities Research


Capital work in progress valued at 70%

14

We have valued capital work in progress at a 30% discount,

assuming peak potential profitability that a plant can achieve

However, in order to have a more calibrated number for CWIP,

we have adjusted CWIP with the capacity utilisation rate for a

particular year

Hence, our year-end number will not match the valuation

number

We have also overlooked the time series for valuation of CWIP


Long-term employee provision treated as debt

15

We have treated long-term employee provision as debt, similar

to our valuation treatment for Coal India

We believe that this remains a liability (although payout timing

is not clear)


Valuation

16

FY15

Valuation Standalone Novelis ABCL ABML Value of Investment

at 50% discount

EV/EBITDA 5.0 6.0 5.0 4.0 -

EBITDA 37,255.7 61,445.1 2,364.2 (141.0) -

EV 186,278.6 368,670.7 11,821.1 (564.2) -

Debt 330,778.9 330,956.3 8,158.0 42.8 -

Cash 81,669.0 7,598.6 1,057.1 4,899.1 -

Capital work in progress 177,323.3 17,344.0 - 731.5

Long term employee provision - 49,664.5 - - -

Market Capitalisation 114,492.0 12,992.5 4,720.2 5,023.5 -

Equity Share Capital 2,064.8 2,064.8 2,064.8 2,064.8 -

Per share TP 55.4 6.3 2.3 2.4 14.0

Total 80


Standalone financials – P&L and Balance Sheet

17

(Rsmn) FY11 FY12 FY13 FY14E FY15E FY16E

Revenue 238,592 265,968 260,569 300,925 337,350 350,589

YoY growth (%) 22.1 11.5 (2.0) 15.5 12.1 3.9

Raw material cost 178,800 205,124 203,379 230,505 248,675 257,100

% of sales 74.9 77.1 78.1 76.6 73.7 73.3

Employee cost 10,448 11,134 12,008 13,224 16,531 18,514

% of sales 4.4 4.2 4.6 4.4 4.9 5.3

Admin & other

expenses 17,490 18,550 23,145 27,184 34,889 39,341

% of sales 7.3 7.0 8.9 9.0 10.3 11.2

Total expenditure 206,738 234,808 238,532 270,914 300,094 314,956

EBITDA 31,854 31,160 22,037 30,011 37,256 35,633

EBITDA margin

(%) 13.4 11.7 8.5 10.0 11.0 10.2

Depreciation 6,875 6,900 7,042 8,662 15,918 20,883

EBIT 24,980 24,260 14,995 21,349 21,337 14,750

Interest expenses 2,200 2,936 4,360 8,467 20,807 28,988

Other income 3,168 6,046 9,831 10,227 9,154 7,765

Exceptional Loss

(Gain) 0 0 0 0 0 0

PBT 25,947 27,370 20,466 23,109 9,684 -6,474

Provision for tax 4,578 4,998 3,474 5,033 2,131 -1,424

Effective tax rate

(%) 17.6 18.3 17.0 21.8 22.0 22.0

Adj Net Profit 21,369 22,372 16,992 18,076 7,554 (5,049)

YoY growth (%) 11.6 4.7 (24.0) 11.9 (60.3) (166.8)

PAT margin (%) 8.8 8.2 6.3 5.8 2.2 (1.4)

Y/E March (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16

Share Capital 1,915 1,915 1,915 2,065 2,065 2,065

Equity warrants 0 5,413 5,413 0 0 0

Reserves and Surplus 295,086 312,997 332,396 369,539 374,194 366,729

Shareholders' Fund 297,001 320,325 339,724 371,604 376,259 368,794

Short term loan 38,904 34,568 37,017 49,923 55,423 60,923

long term loan 51,495 111,167 208,059 280,856 294,856 294,856

Loan fund 90,399 145,734 245,076 330,779 350,279 355,779

Deferred Tax Liability 12,875 12,246 11,911 12,616 12,914 12,715

Total capital

employed 400,275 478,305 596,711 714,999 739,452 737,287

Gross block 142,873 144,779 150,732 256,029 434,577 543,878

Less: Acc

depreciation 67,029 73,277 79,756 88,418 104,337 125,220

Net block 75,844 71,502 70,977 167,611 330,241 418,657

Capital WIP 60,304 162,569 236,051 264,255 125,156 31,906

Net fixed assets 136,148 234,071 307,028 431,866 455,397 450,564

Investments 182,468 180,871 204,821 183,247 173,247 169,247

Cash and bank 2,334 7,223 14,978 17,349 14,180 4,476

Inventories 76,514 77,429 77,026 86,764 88,628 91,342

Debtors 12,555 14,275 15,150 18,636 19,201 19,726

Other CA and loans &

adv 55,345 42,608 47,182 50,970 52,358 51,516

Total CA and loans &

adv 146,748 141,534 154,337 173,720 174,367 167,061

Creditor 40,830 46,598 30,515 39,322 38,077 37,856

Other current

liabilities 13,424 19,502 25,356 19,203 15,274 7,206

Provisions 10,835 12,072 13,604 15,309 10,208 4,522

Net current assets 81,659 63,362 84,862 99,886 110,808 117,477

Total assets 400,275 478,305 596,711 714,999 739,452 737,287



Novelis financials – P&L and Balance Sheet

18

(US$mn) FY11 FY12 FY13 FY14E FY15E FY16E

Revenue 10,577 11,063 9,812 9,506 10,125 10,764

YoY growth (%) 22.0 4.6 (11.3) (3.1) 6.5 6.3

Total expenditure 9,642 10,170 8,921 8,640 9,165 9,733

% of Sales 91.2 91.9 90.9 90.9 90.5 90.4

EBITDA 935 893 891 866 960 1,030

EBITDA margin (%) 8.8 8.1 9.1 9.1 9.5 9.6

Depreciation 404 329 292 324 353 360

EBIT 531 564 599 542 607 670

Interest expenses 194 290 298 316 320 320

Other income (94) (34) (15) (18) (20) (20)

Impairment of

Goodwill 0 111 0 0 0 0

PBT 243 129 286 208 267 330

Provision for tax 83 39 83 60 80 99

Effective tax rate (%) 34.2 30.2 29.0 29.0 30.0 30.0

Net Profit 160 90 203 148 187 231

Minority interest 44 27 1 0 0 0

PAT after MI 116 63 202 148 187 231

YoY growth (%) (71.4) (45.7) 220.6 (26.9) 26.7 23.6

PAT margin (%) 1.1 0.6 2.1 1.6 1.8 2.1

(US$mn) FY11 FY12 FY13 FY14E FY15E FY16E

Share Capital 1,830 1,659 1,654 1,654 1,654 1,654

Reserves and Surplus (1,385) (1,570) (1,445) (1,339) (1,152) (921)

Shareholders' Fund 445 89 209 315 502 733

Long term borrowing 4,065 4,321 4,434 4,423 4,423 4,423

Short term borrowing 38 41 498

Total debt 4,103 4,362 4,932 5,172 5,172 5,172

Minority interest 190 34 30 29 29 29

Deferred Tax Liability 504 366 337 259 259 259

Total Liabilities 5,242 4,851 5,508 5,775 5,962 6,193

Net fixed assets 3,250 3,367 3,753 4,166 4,263 4,253

Other long term

assets 229 186 179 180 180 180

Goodwill 611 611 611 611 611 611

Investments 743 683 627 633 633 633

Cash and bank 311 317 301 119 95 227

Inventories 1,338 1,024 1,168 1,085 1,175 1,257

Debtors 1,508 1,367 1,485 1,467 1,574 1,677


adv 215 160 202 199 199 199


adv 3,372 2,868 3,156 2,870 3,043 3,360

Creditors 1,428 1,296 1,254 1,054 1,137 1,213

Current liab and prov 1,535 1,568 1,564 1,631 1,631 1,631

Net current assets 409 4 338 185 275 516

Total assets 5,242 4,851 5,508 5,775 5,962 6,193 Source: Company, Nirmal Bang Institutional Equities Research


Financials – P&L and Balance Sheet

19

Y/E March (Rs mn) FY11 FY12 FY13 FY14E FY15E FY16E

Revenue 722,023 808,214 801,928 916,482 992,909 1,025,653

YoY growth (%)

18.9 11.9 (0.8) 14.3 8.3 3.3

Total Expenditure 642,736 726,319 723,560 824,873 889,051 920,221

% of Sales

89.0 89.9 90.2 90.0 89.5 89.7

EBITDA 79,287 81,894 78,368 91,608 103,858 105,432

EBITDA margin (%)

11.0 10.1 9.8 10.0 10.5 10.3

Depreciation 27,595 28,696 28,611 35,265 44,283 48,787

EBIT 51,692 53,199 49,757 56,344 59,576 56,645

Interest expenses 18,394 17,580 20,791 28,987 41,598 49,139

Other income 5,133 7,831 10,122 10,422 9,336 7,935

Exceptional Loss (Gain) 0 0 0 0 0 0

PBT 38,432 43,449 39,088 37,778 27,314 15,441

Provision for tax 9,638 7,862 8,857 8,689 6,282 3,551

Effective tax rate (%)

25.1 18.1 22.7 23.0 23.0 23.0

Net Profit before MI 28,794 35,587 30,231 29,089 21,031 11,890

MI & profit of asso 4,230 1,618 (38) (2,282) (2,995) (3,162)

PAT after MI 24,564 33,970 30,269 31,372 24,026 15,051

YoY growth (%)

(37.4) 38.3 (10.9) 3.6 (23.4) (37.4)

PAT margin (%) 3.4 4.2 3.7 3.4 2.4 1.5

Y/E March (Rs mn) FY11 FY12 FY13 FY14E FY15E FY16E

Share Capital 1,990 1,991 1,915 2,065 2,065 2,065

Equity warrants 0 5,413 5,413 0 0 0

Reserves and Surplus 288,243 311,710 345,975 395,467 416,594 429,230

Shareholders' Fund 290,233 319,113 353,302 397,531 418,659 431,295

Short term loan 41,127 37,313 64,421 77,305 85,035 89,287

long term loan 252,532 371,272 498,569 586,241 598,062 588,967

Total loan 293,659 408,586 562,989 663,546 683,098 678,254

Minority Interest 22,169 17,091 17,593 16,619 15,585 14,835

Deferred Tax Liability 37,596 36,050 34,677 33,373 32,431 31,898

Total capital employed 643,657 780,839 968,561 1,111,069 1,149,773 1,156,282

Gross block 392,654 428,945 482,107 707,092 942,186 1,071,688

Less: Acc depreciation 158,014 186,608 221,255 277,434 318,426 358,747

Net block 234,640 242,338 260,852 429,658 623,759 712,941

Capital WIP 92,518 227,981 338,311 297,924 133,232 27,017

Net fixed assets 327,157 470,319 599,162 727,582 756,991 739,958

Goodwill 89,414 110,665 118,397 118,397 118,397 118,397

Investments 108,549 105,510 126,137 127,446 119,407 117,819

Cash and bank 25,400 32,960 37,695 32,327 27,649 26,752

Inventories 137,420 132,460 143,317 156,740 164,237 169,584

Debtors 75,411 80,172 89,523 105,438 111,835 115,554


adv 85,346 81,937 91,664 95,704 97,712 97,909


adv 323,576 327,529 362,199 390,208 401,433 409,798

Creditors 104,334 110,522 96,129 104,524 108,476 110,495

Other current liabilities 43,299 56,003 68,195 73,401 62,386 42,604

Provision 57,406 66,659 73,010 74,638 75,594 76,592

Net current assets 118,537 94,345 124,864 137,644 154,977 180,107

Total assets 643,657 780,839 968,561 1,111,069 1,149,773 1,156,282



Financials – Cash flow and key ratios

20

Y/E March FY11 FY12 FY13 FY14E FY15E FY16E

Per share (Rs)

Basic EPS 12.8 17.7 15.8 15.2 11.6 7.3

Book value 151.6 166.7 184.5 192.5 202.8 208.9

Valuation

P/E 8.4 6.1 6.8 7.1 9.3 14.8

P/BV 0.7 0.6 0.6 0.6 0.5 0.5

EV/EBITDA 5.3 6.5 8.6 8.6 8.0 7.8

EV/Sales 0.6 0.7 0.8 0.9 0.8 0.8

M-cap/Sales 0.3 0.3 0.3 0.2 0.2 0.2

Return Ratio (%)

ROCE 8.2 7.6 5.6 5.2 4.9 4.5

RoCE excluding CWIP 9.6 10.1 8.5 7.6 6.1 4.8

ROE 9.7 11.1 9.0 8.4 5.9 3.5

Margin Ratio (%)

EBITDA Margin 11.0 10.1 9.8 10.0 10.5 10.3

PBIT Margin 7.2 6.6 6.2 6.1 6.0 5.5

PBT Margin 5.3 5.3 4.8 4.1 2.7 1.5

PAT Margin 3.4 4.2 3.7 3.4 2.4 1.5

Turnover Ratio

Asset turnover ratio (x) 1.8 1.9 1.7 1.3 1.1 1.0

Avg collection period (days) 38.1 36.2 40.7 42.0 41.1 41.1

Avg payment period (days) 59.2 55.5 48.5 46.3 44.5 43.8

Solvency Ratio

Debt-equity 1.0 1.3 1.6 1.7 1.6 1.6

Interest coverage ratio 4.3 4.7 3.8 3.2 2.5 2.1

Y/E March (Rsmn) FY11 FY12 FY13 FY14E FY15E FY16E

EBIT 51,692 53,199 49,757 56,344 59,576 56,645

(Inc.)/Dec in working

capital (7,084) (9,322) (38,740) (18,450) (21,600) (25,618)

Cash flow from

operations 44,608 43,877 11,017 37,893 37,976 31,027

Other income 4,499 5,421 4,834 10,422 9,336 7,935

Depreciation 27,340 26,452 28,219 56,178 40,993 40,321

Interest paid (-) 25,410 28,531 36,728 43,525 44,796 49,139

Tax paid (-) 13,131 10,901 13,478 9,992 7,224 4,084

Dividends paid (-) 3,838 4,110 3,977 3,136 3,382 2,899

Net cash from

operations 34,069 32,207 (10,113) 47,840 32,902 23,161

Capital expenditure

(-) 77,598 124,007 117,104 163,684 73,692 31,754

Net cash after

capex (43,529) (91,800) (127,217) (115,844) (40,790) (8,594)

Inc./(Dec.) in short-

term debt (37,265) (3,851) 20,651 12,884 7,730 4,252

Inc./(dec.) in long-

term debt 74,650 93,362 122,705 87,673 11,821 (9,096)

(Inc.)/Dec. in

investments 3,906 0 0 0 0 0

Equity

issue/(Buyback) 0 5,413 0 16,239 0 0

Cash from

Financial Activities 41,291 94,925 143,356 116,796 19,552 (4,844)

Others 5,684 4,436 (11,404) (6,320) 16,560 12,541

Opening cash 21,954 25,400 32,960 37,695 32,327 27,649

Closing cash 25,400 32,960 37,695 32,327 27,649 26,752

Change in cash 3,446 7,560 4,735 (5,368) (4,678) (896)



Contact Us

Corporate/Correspondence Address:

301/302, B-2, 3rd Floor, Marathon Innova,

Opp. Peninsula Corporate Park,

G.K. Marg, Lower Parel (W),

Mumbai-400013

21

Team Details:

Name Email Id Direct Line

Rahul Arora CEO [email protected] +91 22 3926 8098 / 99

Hemindra Hazari Head of Research [email protected] +91 22 3926 8017 / 18

Sales and Dealing:

Neha Grover AVP Sales [email protected] +91 22 3926 8093

Ravi Jagtiani Dealing Desk [email protected] +91 22 3926 8230, +91 22 6636 8832

Sudhindar Rao Dealing Desk [email protected] +91 22 3926 8229

Pradeep Kasat Dealing Desk [email protected] +91 22 3926 8102/8103, +91 22 6636 8831

Michael Pillai Dealing Desk [email protected] +91 22 3926 8100/8101, +91 22 6636 8830


THANK YOU

22

Institutional Equities 23

Appendix


Global aluminium consumption slowing down

24

(9)

(5)

-

5

9

14

15

22

29

36

43

50

Jan-97 Oct-99 Jul-02 Apr-05 Dec-07 Sep-10 Jun-13

12M rolling global annual production Growth rate

(mt) (%)

(12)

(6)

-

6

12

18

15

22

29

36

43

50


12M rolling Global annual consumption Growth rate

(%)(mt)

After witnessing steep fall in production and consumption in 2009, the

growth rate recovered sharply due to China stimulus

However, the growth rate has significantly decelerated thereafter with

no growth in ex-China markets

Source: Bloomberg


Global aluminium market in surplus…

25

Due to low demand, the aluminium market continues to remain in large surplus

As visible in the chart below, it is also one of the longest surplus periods in the aluminium market

As of 30 June 2013, the global market had a surplus of 1.43mt on an annual basis

(1)

-

1

2

3

4


(mt)

Source: Bloomberg


Aluminium production-consumption (barring China)

26

(12)

(8)

(4)

-

4

8

17

19

21

23

25

27


12M rolling ex-China annual production Growth rate

(%)(mt)

(20)

(10)

-

10

20

15

18

21

24

27


12M rolling ex-China annual consumption Growth rate

(%)(mt)

As visible in the chart below, production growth rate in countries other than China has fallen into negative terrain (negative growth for the past 11 months) implying the production cut by developed markets

However, consumption is also shrinking at a similar pace, leaving no place to breathe for aluminium producers

Source: Bloomberg


…driven by surplus in ex-China markets

27

Despite the reduction in aluminium production, markets other than China continued to remain in large surplus, accelerating further in the past few months

As of 30 June 2013, the markets other than China showed a net surplus of 1.28mt on a yearly basis

(1.2)

-

1.2

2.4

3.6

4.8

Jan-97 Oct-99 Jul-02 Apr-05 Jan-08 Oct-10 Jun-13

(mt)

Source: Bloomberg


China aluminium market patterns

28

(10)

-

10

20

30

40

-

5

10

15

20

25


12M rolling China annual production Growth rate

(%)(mt)

(10)

-

10

20

30

40

50

-

4

8

12

16

20

24


12M rolling China annual consumption Growth rate

(%)(mt)

China has been the only sailor in the aluminium market despite the troubled waters

Although consumption growth has remained steady at over 10% for the past few months, production growth has also been maintained at par

Source: Bloomberg


NET result = China is a net exporter

29

Barring the 2009-10 period (where China witnessed a massive surge in aluminium demand, leading to metal deficit), the country has largely been in surplus since 2002

As of 30 June 2013, the Chinese market had a net surplus of 0.15mt

(1.6)

(1.2)

(0.8)

(0.4)

0.0

0.4

0.8

1.2

Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10 May-13

(mt)

Source: Bloomberg


Net result = China is a net exporter

30

• China has been a net exporter of aluminium throughout the last decade

barring a short span in 2009, where stimulus-led demand outpaced capacity

addition

• As of 31 July 2013, China posted net aluminium exports of 2.54mt

(3.5)

(2.8)

(2.1)

(1.4)

(0.7)

-

0.7

Jan-03 Mar-04 May-05 Jul-06 Sep-07 Nov-08 Jan-10 Mar-11 May-12 Jul-13

(mt)

Source: Bloomberg


Automobile industry in US and Europe

31

10

12

14

16

18

20

Apr-92 Nov-95 Jun-99 Dec-02 Jul-06 Jan-10 Aug-13

(mn)

Automobile sales in the US have recovered

smartly, driven by stimulus package of the

government, but still below the 2000-06 peak

However, Europe automobile sales have

started showing a declining trend

Source: Bloomberg

-16

-12

-8

-4

0

4

8

12

12

13

14

15

16

17

18

19

Jan-02 Apr-03 Jul-04 Oct-05 Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13

Europe Auto Sales Growth rate

(%)(mn)


Automobile industry status contd….

32

After witnessing see-saw growth in the past

couple of months, Japan’s automobile output

has again fallen into negative terrain

China’s automobile sales growth has

stabilised at slightly over 10%, but way below

its peak growth rate

Source: Bloomberg

(10)

0

10

20

30

40

50

60

70

-

5.0

10.0

15.0

20.0

25.0

30.0

Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13

China Auto Production Growth rate - RHS

(mn) (%)

(40)

(30)

(20)

(10)

0

10

20

30

40

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jan-84 Dec-86 Nov-89 Oct-92 Sep-95 Aug-98 Jul-01 Jun-04 May-07 Apr-10 Mar-13

Japan Auto Production Growth rate - RHS

(mn) (%)


Housing data still way below high

33

European housing permit index –

lowest in decades US housing starts recovering, but

way below its peak

3,000

5,500

8,000

10,500

13,000

15,500

Jan-64 Dec-70 Oct-77 Aug-84 Jul-91 May-98 Apr-05 Feb-12

(000's)

0

7

14

21

28

35

Aug-07 Oct-08 Nov-09 Dec-10 Feb-12 Mar-13

(%)

China’s floor space under

construction growth rate

improving but steady

Source: Bloomberg

-

50

100

150

200

250

300

350

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

(x)


Some more data on China

34

China’s fixed asset investment

decelerating, but still alarming

China’s fixed asset investments have touched

73% of GDP, resulting in huge slackness in

the industry

Source: Bloomberg

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Feb-01 Aug-02 Feb-04 Aug-05 Feb-07 Aug-08 Feb-10 Aug-11 Feb-13

Gross Fixed Assets Investment Growth rate-RHS

(bnYuan) (%)

-

10

20

30

40

50

60

70

80

Mar

-00

Nov

-00

Jul-0

1

Mar

-02

Nov

-02

Jul-0

3

Mar

-04

Nov

-04

Jul-0

5

Mar

-06

Nov

-06

Jul-0

7

Mar

-08

Nov

-08

Jul-0

9

Mar

-10

Nov

-10

Jul-1

1

Mar

-12

Nov

-12

(%)


Aluminium inventory

35

As visible in the chart below, large contango

coupled with low financing costs led to massive

inventory addition

Though US 10-year G-sec yield has started

strengthening, it is yet to reflect in LIBOR

market (12-month LIBOR rate)

(360,000)

(180,000)

0

180,000

360,000

540,000

(18)

(9)

0

9

18

27

Jan-92 Jun-95 Oct-98 Feb-02 Jul-05 Nov-08 Mar-12

Inventory Addition Premium over 27 months contract

(%) (tonne)

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Jan-11 May-11 Sep-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

(%)

Source: Bloomberg


Geography-wise aluminium production and consumption

36

Source: Industry

(‘000 tn) CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12

Aluminium Consumption

China 5,886 7,083 8,790 12,347 12,560 13,879 16,932 19,222 20972

North America 7,011 7,175 7,191 6,721 6,073 4,724 5,285 5492 5893

East/Central Europe 1744 1802 1974 1,947 1,966 1,621 1,797 0 0

Western Europe 6,614 6,512 6,801 7,159 6,882 5,578 6,216 8420 7697

Latin America 1,191 1,341 1,366 1,443 1,609 1,576 1,853 1,996 2139

Oceania 435 450 425 444 462 442 474 459 492

Rest of Asia(1) 5,822 6,174 6,296 6,241 6,200 5,585 6,498 6,704 6688

Africa 400 414 460 492 648 714 760 546 562

India 860 960 1,080 1,207 1,284 1,478 1,715 1,839 1919

Total 29963 31911 34383 38001 37684 35597 41530 44678 46362

(‘000 tn) CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12

Aluminium Production

China 6,689 7,806 9,349 12,588 13,600 13,500 17,300 19,200 22200

North America 5,110 5,382 5,333 5,643 5,785 4,759 4,689 4,971 4851

East/Central Europe 4,534 4,627 4,678 4,899 5,124 4,432 4,610 8,667 8241

Western Europe 4,294 4,345 4,174 4,321 4,625 3,722 3,801 0 0

Latin America 2,356 2,390 2,494 2,559 2,660 2,507 2,305 2,185 2051

Oceania 2,245 2,252 2,274 2,316 2,296 2,212 2,278 2,307 2187

Rest of Asia(1) 2,128 2,446 2,661 2,763 2,936 3,220 3,985 4,793 5018

Africa 1,711 1,753 1,865 1,816 1,715 1,682 1,746 1,803 1640

India 851 965 1,115 1,222 1,296 1,480 1,603 1,660 1708

Total 29,918 31,966 33,943 38,127 40,037 37,514 42,317 45,586 47,896


Consumption pattern in aluminium

37

Construction, 29

Automobiles, 27

Packaging, 10

Consumer goods, 10

Electricity, 10

Machinery, 8

Others, 6

Construction, 39

Automobiles, 16

Consumer Durables, 16

Electricals, 15

Machiney, 6

Packaging, 4Others, 4

Global – Construction and automobile sectors

account for 56% of aluminium market

China – Construction and automobile sectors

account for 55% of aluminium market

Source: Crisil

Global Demand – 46.3mt China Demand – 21.0mt


Consumption pattern in aluminium cont’d…

38

Transport, 37

Packaging, 27

Construction, 10

Machanical Machiney,

8

Electricals, 8

Domestic Appliances,

6

Others, 4

Transport, 39

Building, 25

Packaging, 15

Machiney & Equipment,

14

Others, 7

US – Packing industry accounts for over 1/4th of

the aluminium market

Europe – Construction and automobile sectors

account for 64% of the aluminium market

Source: Crisil

US Demand – 5.9mt Europe Demand – 7.7mt


Consumption pattern in aluminium cont’d…

39

Power, 39

Construction, 15

Automobiles, 23

Packaging, 7

Consumer Durables, 6 Machinery,

7

Others, 3

Transport, 41

Building & Constructio

n, 15

Fabricated Metal, 13

Food, 12

Electrcal Appliances,

4

Industrial Machinery,

3

Others, 12

Japan – The scenario is similar in this market, where

construction and automobile sectors account for 56% of the

aluminium market

India – Unlike all other countries, power sector accounts for

largest share, i.e. 39%, driven by the transmission business

Source: Crisil

Japan Demand – 2.0mt India Demand – 1.9mt

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