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BuyPrevious Recommendation: Buy Rs228

10 November 2010

2QFY11 Results Update

SECTOR: METALS

HindalcoBLOOMBERG

HNDL IN

REUTERS CODE

HALC.BO

STOCK INFO.

BSE Sensex: 20,876

S&P CNX: 6,276

Consolidated

Sanjay Jain (SanjayJain@MotilalOswal.com);Tel:+912239825412/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com); +9122 39825425

Equity Shares (m) 1,984.4

52-Week Range (Rs) 239/125

1,6,12 Rel. Perf . (%) 3/13/53

M.Cap. (Rs b) 452.4

M.Cap. (US$ b) 10.2

Hindalco's subsidiary Novelis reported adjusted EBITDA of US$290m against our est. of US$250m (up 47% YoY and

up 10% QoQ). Total shipments increased 6% YoY to 767,000 tons but declined 2% QoQ due to a 12-day strike at itsKorean plant. Volumes in North America and Europe increased 10-12% YoY due to higher demand particularly from

the automobile sector. EBITDA per ton increased for the sixth consecutive quarter to US$378/ton due to continued

strong demand, product portfolio optimization and tight control over costs. Novelis plans to increase capacity by 20%

over FY11-14 through de-bottlenecking and new capacity at Pinda in Brazil. The 220ktpa Pinda project is expected

to be completed by 3QCY12.

Aluminum production at Indian operation declined 12% YoY to 123k tons due to power outage at the Hirakud smelter

during 2QFY11. The smelter is expected to be fully normalized by early 4QFY11. Production disruption and higher

prices of inputs like CPC and furnace oil resulted in higher operating costs. Segmental EBIT of copper declined 41%

YoY (flat QoQ) to Rs1.3b due to lower TcRc margins. Copper production increased 5% YoY to 94k tons.

Novelis pricing environment favorable; raising LME estimates; upgrading earnings

The pricing environment for Novelis remains positive due to tight supply side conditions globally. We are upgradingour FY11 EBITDA estimates for Novelis from US$910m to US$1.1b due to strong quarterly performance and continued

positive traction. We have also incorporated higher LME prices (US$2,200/t; raised by 10%) to model stronger base

metal prices driven by a second round of quantitative easing. Consequently we are upgrading consolidated FY11

EPS by 23% to Rs18.5 and FY12 EPS by 10% to Rs19.5.

The stock trades at an EV/EBITDA of 6.9x FY11E and 6.4x FY12E. We are raising our target price from Rs230 to

Rs260 based on 7x FY12E EV/EBITDA. We have toned down our target EV/EBITDA multiple from 7.5x to 7x due to

an upgrade in LME assumptions and the best ever performance of Novelis. Maintain Buy.

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Hindalco

210 November 2010

Novelis posts best ever results; EBITDA per ton US$378; adjusted EBITDAUS$290m

Hindalco's subsidiary Novelis posted strong 2QFY11 adjusted EBITDA of US$290m

against our estimate of US$250m (up 47% YoY and up 10% QoQ). Segmental income

increased sequentially across North America, Europe and Asia, but declined in SouthAmerica.

Total shipments increased 6% YoY to 767,000 tons. Shipments were 2% lower QoQ

due to lower shipments in Asia because of a 12-day strike at its Korean plant. This is

expected to be made up in 2HFY11. FRP volumes increased 6.3% YoY and declined

1.2% QoQ to 737k tons. Volumes in North America and Europe increased 10-12%

YoY due to higher demand particularly from the automobile sector.

EBITDA per ton continued to increase for the sixth consecutive quarter to US$378/

ton due to continued strong demand, product portfolio optimization and tight control

over costs.

Novelis posts strong growth in operating cash flow (US$ m)

and in adjusted EBITDA (US$ m)

Source: Company/MOSL

Novelis has announced closure of Bridgnorth plant. This will allow incremental

production of higher margin products within European operations and cost savings of

about US$15m.

-400

-200

0

200

400

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

131

229

152

183

218

88

127

53

124

200 199

231

263290

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

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Hindalco

310 November 2010

Source: Company/MOSL

Novelis to add 20% production capacity with de-bottlenecking and Pinda

Demand for rolled products is strong due to strong demand from the automobile industry

in Europe and Asia and industrial products in Asia and North America. FRP demand is

expected to post 6% CAGR to reach 22mt over 2010-15.

Novelis has planned a 20% increase in capacity over FY11-14 through de-bottlenecking

and new capacity addition at Pinda in Brazil. The 220ktpa Pinda project is expected to

be completed by 3QCY12.

De-bottlenecking projects across its facilities worldwide will expand production capacity

by ~300k tons a year at marginal capex of US$80m, leading to improved RoCE.

Net debt came down by US$97m QoQ to US$2.1b after incurring Capex of US$37m

and working capital increase of US$83m. Total cash and cash equivalents increased

by US$93m QoQ to US$512m at end 2QFY11. Novelis is deploying cash generated

from strong operating performance in reducing high cost working capital financing.

Capex during 1HFY11 was US$71m vs FY11 target of US$250m as Novelis deferredsome of the shutdowns for de-bottlenecking to meet strong demand from its customers.

Novelis expects to meet the Capex target as most of the capex will be back ended.

EBITDA per ton improves, shipments stabilize

Segmental income improves (US$ m)

268

12

240

61

166

273 291306 338

378

767779756

683724

691643658

806825

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

EBITDA/ton (US$) Shipments (ktpa)

-50

0

50

100

150

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

North America Europe Asia South America

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Hindalco

410 November 2010

Hindalco standalone results highlights

Hindalco's standalone 2QFY11 adjusted PAT increased 28% YoY to Rs4.6b against

our estimate of Rs5.2b. Reported PAT of Rs4.3b had non recurring VRS expense of

Rs220m pertaining to the closure of the Kalwa Foil plant.

Net sales rose 19% YoY to Rs58.6b. Aluminum production declined 12% YoY to 123k

tons (better than our estimate of 118k tons) due to power outage at the Hirakud

smelter. The smelter is expected to be fully normalized by early 4QFY11.

Copper production increased 5% YoY to 94k tons. A breakdown of a cooling tower at

sulfuric acid plant number 3 in November 2010 will result in production loss of 8,000

tons in 3QFY11.

Segmental EBIT of the aluminum segment rose 72% YoY to Rs4.5b (against our

estimate of Rs4.9b) due to 14% higher average LME, though the appreciation of the

rupee against the US dollar eroded nearly 4% gains. Disruption of production (down

12% YoY) at Hirakud and higher prices of inputs like CPC (calcined petroleum coke)

and furnace oil resulted in higher operating costs. Reported EBIT of Rs4.24b had

non-recurring VRS expense of Rs220m.

Segmental EBIT of copper declined 41% YoY (flat QoQ) to Rs1.3b due to lower

TcRc margins.

Interest costs were lower by 21% YoY at Rs526m due to lower interest and finance

charges.

Share of aluminum in segmental revenue (Rs b) falls due to lower volumes

Source: Company/MOSL

19

21 2

0

16

14

17 1

920

19

19

27

36 2

1

22

25

33 3

434

33

40

1QFY

09

2QFY

09

3QFY

09

4QFY

09

1QFY

10

2QFY

10

3QFY

10

4QFY

10

1QFY

11

2QFY

11

Aluminium Copper

Incremental capacity through Pinda expansion and de-bottlenecking

Source: Company/MOSL

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Hindalco

510 November 2010

Source: Company/MOSL

CoP of aluminum products rose 11% QoQ to US$2,100/ton; premium over LME remains flat

Share of aluminum in segmental EBIT (Rs b) drops led by a rise in costs

Greenfield projects on track; expansion at Hirakud announced

Utkal Alumina: A 1.5mtpa alumina refinery is expected to be completed on time by

the end of 2QFY12. About 83% of the project cost has been committed. Contractors

are working at the site for civil and structural work and have mobilized more than

7,000 people. Piling, fabrication, concreting and tank erection are underway. The

erection of major equipment like boilers, evaporators and turbines has begun.

Mahan: A 359ktpa smelter along with a 900MW CPP is expected to be complete on

time by the end of 2QFY12. About 83% of the project cost has been committed.

Major approvals are in place and site activities are on schedule. Nearly 12,000 people

are working at the site.

Hirakud: The smelter expansion project from 155ktpa to 161ktpa is nearing completion.

Sixteen of the 28 pots are in operation and the rest will be taken in line soon. An

expansion from 161ktpa to 213ktpa, along with a 100MW power plant will be complete

in 4QFY12. Site activities like a boundary wall and area grading are progressing well.

Major orders have been placed. Further expansion at Hirakud: Hindalco plans to expand the smelting capacity at

Hirakud from the proposed 213ktpa to 360ktpa with a corresponding increase in back-

up captive power from the proposed 467.5MW to 967.5MW.

7.5

7.2

5.3

1.6

4.6

2.6

4.4 6

.15.5

4.5

0.7

1.4

1.2

0.5

2.2

1.6 1

.31.2

1.3

1.6

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

Aluminium Copper

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Hindalco

610 November 2010

Novelis pricing environment favorable; raising LME estimates; 10%earnings upgrade

The pricing environment is positive due to tight supply-side conditions globally. Novelis

announced two price hikes in 3QFY11 in Europe and North America. While cost

inflation due to a wage hike in Korea will offset price hikes, we believe Novelis willstill have a positive impact on it margins after price hikes. 3QFY11 remains seasonally

weak in the West due to winter holidays.

We are upgrading our FY11 EBITDA estimates for Novelis from US$910m to US$1.1b

due to strong quarterly performance and continued positive traction. Although Hindalco's

standalone 2QFY11 results were weaker than our expectations due to cost inflation

because of coal, pet coke and furnace oil prices, earnings are upgraded because we

have changed the LME assumption for aluminum from US$2,000/ton to US$2,200 to

model stronger metal prices driven by a second round of quantitative easing.

Consequently, we are raising consolidated FY11 EPS by 23% to Rs18.5 and FY12

EPS by 10% to Rs19.5. The stock trades at an EV/EBITDA of 6.9x FY11E and 6.4x FY12E. We are raising

our target price from Rs230 to Rs260 based on 7x FY12E EV/EBITDA. We have

toned down our target EV/EBITDA multiple from 7.5x to 7x due to an upgrade in

LME assumption and best ever performance of Novelis. Maintain Buy.

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Hindalco

710 November 2010

Shareholding Pattern (%)

Sep-10 Jun-10 Sep-09

Promoter 32.1 32.1 36.1

Domestic Inst 15.7 15.9 18.9

Foreign 39.0 37.9 28.9

Others 13.2 14.2 16.1

Stock performance (1 year)

Comparative valuations

Hindalco Nalco Sterlite

P/E (x) FY11E 12.3 21.0 12.9

FY12E 11.7 16.3 8.5

P/BV (x) FY11E 2.7 2.3 1.5

FY12E 2.2 2.1 1.3

EV/Sales (x) FY11E 0.9 3.6 1.8

FY12E 0.9 3.0 1.4

EV/EBITDA (x) FY11E 6.9 11.4 9.6

FY12E 6.4 8.4 5.0

EPS: MOSL forecast v/s consensus (Rs)

MOSL Consensus Variation

forecast forecast (%)

FY11 18.5 16.2 14.3

FY12 19.5 19.0 2.8

Target Price and Recommendation

Current Target Upside Reco.

Price (Rs) Price (Rs) (%)

228 260 14.0 Buy

Company description

Hindalco is the largest aluminum producer in India, with

captive bauxite mines sourcing ~67% requirement for its1.5mtpa alumina refinery. Along with a 0.54mtpa smelting

capacity, it is also the largest maker of flat rolled aluminum

products in India. After successfully turning Novelis around

in FY10, the company is focusing on tripling its aluminum

production capacity in India in the next three years through

brownfield and greenfield projects. Its copper smelting

capacity of 500ktpa is the largest in Asia.

Key investment arguments

Hindalco has put domestic greenfield projects on the

fast track to add 718ktpa of capacity by the end of

FY12. Aluminum production is expected to post 21%

CAGR and alumina 28% CAGR over FY10-14.

Hindalco's new smelting capacities are coming close

to energy sources and alumina facilities will be set up

close to bauxite mines, ensuring low cost of production.

Novelis' cash flows have started improving due to well

planned restructuring, expiry of price ceiling contracts

and the return of pricing power due to changing industry

dynamics.

Key investment risks

Unexpected fall in aluminum prices and sluggish growth

in developed countries could adversely impact earnings.Recent developments

Hindalco's copper production at Smelter-3 in Dahej was

disrupted due to the breakdown of a cooling tower at

the sulfuric acid plant. The repair of the cooling tower

is expected to be completed in two weeks.

Valuation and view

The stock trades at a P/E of 11.7x FY12E and EV/

EBITDA of 6.4xFY12E. Maintain Buy.

Sector view

Base metal prices have risen by 15-25% from their

recent lows in August on improved demand, production

curbs on certain Chinese capacities and the depreciation

of the US dollar. Rising energy costs are increasing

costs of production of marginal players, which supports

higher LME prices. ICSG expects the world copper

market to post a deficit of 400kt as increased economic

activity will boost demand faster than the growth of

refined production. Additional quantitative easing in

developed markets to maintain economic recovery will

support higher metal prices in the near term.

Hindalco: an investment profile

120

150

180

210

240

Nov-09 Feb-10 May-10 Aug-10 Nov-10

0

15

30

45

60

Hindalco (Rs) - LHS Rel. to Sensex (%) - RHS

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Hindalco

810 November 2010

Financials and Valuation

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Hindalco

910 November 2010

N O T E S

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Hindalco

1010 November 2010

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MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Hindalco

1. Analyst ownership of the stock No

2. Group/Directors ownership of the stock No

3. Broking relationship with company covered No

4. Investment Banking relationship with company covered No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required

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