�� Hindalco – positive vibes, should bring confidence: We visited two of
Hindalco’s sites, Renukoot and Mahan, and have come back confident on the
execution of expansion projects in Mahan. Management came out quite
strongly defending their project schedules, bauxite availability and ability to
fine tune operations to maintain margins even under an inflationary
environment. We think this should give investors confidence in projects which
we believe have been a key drag for the stock. Recommend buying on dips.
�� Renukoot – well settled operations, cash cow: These operations have a
capacity of 410ktpa and management is confident of increasing production by
10ktpa every year through de-bottlenecking. They are also doing simulation
studies targeted at unlocking the full potential of these facilities which they
peg at a 16% increase from current levels. We also visited the Krishnashilla
mines of NCL which supplies coal to Renukoot, and noted the quality of coal
is much better at 4500kCal. Hindalco is putting up a pipe belt conveyor to
transport coal and should benefit from FY13 onwards.
�� Mahan – best in class: The Mahan project is 359ktpa of aluminium smelter
with a 900MW captive power plant. This facility will start in phases from Q4
FY12. The power plants are in the advanced stages with hydro testing in the
first unit. Management seemed very confident of achieving the targets and is
looking to commission 40 pots by Dec 2011. They have 165ktpa of surplus
alumina which will help initially till the Utkal alumina comes in.
�� Bauxite – enough in pipeline: Management exuded confidence that they
have 15 yrs of captive mine life on expanded capacity and will take it to 30yrs
with leases in the pipeline. They also buy 30% under long term agreements
from 3rd party mines to conserve bauxite; pricing is on a cost plus basis.
�� Coal – worrisome but confident of resolution: The Renukoot operations
have just been allocated a new mine under linkage from Coal India. However,
coal for the Mahan smelter is still in limbo and management are hopeful of
getting tapering linkage till the Mahan coal block issue is resolved.
Earnings and target price revision
�� No change.
�� 12-month price target: Rs259.00 based on a PER methodology.
�� Catalyst: 2Q FY12 earnings and execution of projects
Action and recommendation
�� Defensive call: Overall, Hindalco looks best placed vs peers with stable
earnings from Novelis, world class and low cost Indian operations and can rerate
once market confidence in its upcoming facility increases. Trading at 6.5x
PER compared to global average of 15x on FY12E doesn't look demanding.