aluminium sector update - rel money - 13 01 09

8/14/2019 Aluminium Sector Update - Rel Money - 13 01 09

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1313131313ththththth JJJJJanuaranuaranuaranuaranuary 2009y 2009y 2009y 2009y 2009

Contd...

Aluminium Sector in a dilemmaThe current business scenario in the global aluminium sector has turned gloomy

following a sharp decline in prices despite gallant attempts to salvage the situation.

The Aluminium sector has reached its new climax with prices having corrected sharply

from $ 3305/tonne during July '08, to a new low of $1490/tonne in Dec'08. The aluminium

sector is faced with tough times ahead on account of build up in inventory position

indicating surplus supply and fall in price due to demand slowdown.

Source: Reliance Money Research

Industry-wise consumption of Aluminium in CY07.

28%

22%

15%

12%

10% 9% 4%

Transport Construction Packaging Electrical

Engineering Consumer durables Others

Construction, Transport and Packaging industry accounts for about 65% of industry

wise consumption of Aluminium while Europe, N. America and China contribute 71%

of the annual consumption. The three sectors and three geographical areas are the

worst hit by the global slowdown. This has prompted a fall in consumption leading to

inventory built up on all three exchanges.


Break-up of Aluminium consumption -geographically

21%

17%

33%

20%

9%

Europe (Ex Russia) N America China Asia (Ex China) Rest of World

Aluminium Sector

Construction, Transport and

Packaging industry accounts for about

65% of industry wise consumption of

Aluminium while Europe, N. America

and China contribute 71% of the

annual consumption.

Pankaj [email protected].: +91-22-30443319

Poonam Bisht

[email protected].: +91-22-30443318


2/13

2

13th January 2009

Contd...

Alumina, which is key intermediate for the production of aluminium, accounts for 32% of

total aluminium cost for integrated producers. The price of alumina has drastically fallen

from all time high of $ 435/tonne in July '08 to as low as $ 225/tonne in Dec '08. Further

decline in price of alumina would take away the support which integrated aluminium

producers were deriving by selling them separately. Though for non-integrated aluminium

producers it will help in reducing their marginal cost of production to a certain extent.

Source: LME/Reliance Money Research

Aluminium Inventory and Price trend

Source: Bloomberg/Reliance Money Research

Price trend of Alumina

0

50

100

150

200

250

300

350

400

450

500

2-Jan-08

2-Fe

b-08

2-Ma

r-08

2-Apr-0

8

2-Ma

y-08

2-Jun-08

2-Jul-0

8

2-Au

g-08

2-Se

p-08

2-Oc

t-08

2-No

v-08

2-De

c-08

($/Tonne)

Alumina

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

2,600,000

02-Ja

n-08

06-Feb

-08

12-M

ar-08

18-A

pr-08

27-M

ay-08

01-Ju

l-08

05-A

ug-08

10-S

ep-08

15-O

ct-08

19-N

ov-08

29-D

ec-08

(Tonne

)

$100

$600

$1,100

$1,600

$2,100

$2,600

$3,100

$3,600

($/tonne

)

Inventory Aluminium PriceThe price of alumina has drastically

fallen from all time high of $ 435/tonne

in July '08 to as low as $ 225/tonne in

Dec '08.


3/13

3

13th January 2009

Demand & Supply Scenario

Vulnerable Demand Situation

Global demand growth for aluminium has reduced sharply from its peak of 7.4% y-o-y

in CY07 to 3.9% y-o-y in CY08E and is expected to reach a new low 2.6% y-o-y in

CY09E. China, which accounts for 33% of global aluminium trade, is witnessing fall in

demand from 39% y-o-y growth in CY07 to 9% y-o-y growth in CY08E. While, the

aluminium demand from rest of world has also shown miniscule improvement over the

pervious year. But, China still has drag effect on the rest of the world because it was

China that had driven about 80% of the incremental demand in CY07.

Built up Inventories is further worsening the situation.Automobile and construction industries along with packaging industry which account

for 65% of the total Aluminium consumption, are experiencing recession due to the

global economy slowdown. So, slump in these industries have directly impacted the

demand of aluminium sector at large. Further, to worsen the situation there has been a

significant decline in prices of aluminium from high of $ 3000/ton in July '08 to $1500/

ton in Dec '08.


Growth in world's aluminium demand

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

NAmerica

W

Europe

SAmerica

As

ia(less

China,

Japan

)

Aus

tra

lia

MiddleEas

t

Africa

Eas

tEurope

CIS

China

Japan

Globa

ldeman

d

Expec

ted(%)grow

th(Yo

Y)

2 00 7 Y oY g r. (% ) 2 008 Y oY g r. (% ) 2 00 9 Y oY g r. (% )


CRU Aluminium Cash Cost Curve

Contd...

Automobile and construction industries

along with packaging industry which

account for 65% of the total Aluminium

consumption, are experiencing

recession due to the global economy

slowdown.


4/13

4

13th January 2009

The cost of producing aluminium ranges from $1100-$2700/tonne for different

producers. Any fall in the price below their cost of production will force the aluminium

producers to shut down the operations. Of late, India's Madras Aluminium - a Vedanta

group company has temporarily shut down its capacity as its' cost of production is

above the current LME Aluminium price and it finds selling the power produced a

profitable proposition value than using it for producing Aluminium. The combined effects

of global slowdown and fall in price of aluminium have led to increase the global

Aluminium inventory. It is expected that inventory level will rise from 0.32 Mn tonne in

CY07 to 4.6 Mn tonne in CY09E. The current inventory in all three exchanges is in the

vicinity of 2.5mn tonnes.

Effects of global demand & supply situation on global

aluminium players

It was earlier expected that global aluminium production would be 41.8 Mn tonne,

while the consumption would be 41.2 Mn tonne in CY08E-a mere surplus of about 0.5

mn tonne and about 0.2 mn tonne surplus in FY09E. But the aftermath of global

slowdown has led to built up of inventory position to upwards of 2 mn tonne in CY08;

this in turn resulted in drastic fall in price of aluminium to $ 1500/tonne in Dec 08. A

similar surplus of 4.6 mn tonne is expected in CY09.

In order to rationalize the current scenario of increase in inventory position and fall in

price of aluminium have resulted in massive production-cuts and delay in capex plans

by many companies across the world. The total global aluminium production-cuts, which

amount to 6.82 mn tpa, in which China accounts for 4.05 mn tpa of aluminium production-

cuts and balance by rest of the world has been undertaken. It is anticipated that such

action of production-cuts and capex plans delays across the world will help in filling the

gap between demand and supply situation. Thus, this may enable the world aluminium

price to reach at its rationale level.


Metal Balance

Global Metal Balance for Aluminium

Contd...

4648

2501

324-524

-1000

0

1000

2000

3000

4000

5000

2006 2007 2008E 2009E

('000tonne

)

It is expected that inventory level will

rise from 0.32 Mn tonne in CY07 to 4.6

Mn tonne in CY09E.

The total global aluminium production-

cuts, which amount to 6.82 mn tpa, in

which China accounts for 4.05 mn tpa

of aluminium production-cuts and

balance by rest of the world has been

undertaken.


5/13

5

13th January 2009

Outlook of Indian aluminium players vis--vis the global aluminium

scenario

Indian Aluminium players have not remained untouched by the current global scenario

that prevails in the aluminium sector. Hindalco, Nalco & Sterlite Industries are three

main players in Indian aluminium sector. Madras Aluminium Company Ltd, which

belongs to Vedanta Group, has temporarily shut down its 40,000 tonne of aluminium

production. MALCO's marginal cost to produce a tonne of aluminium is $1600/tonne,

which is above the current LME price at which aluminium is trading, making it difficult

for Malco to continue production. On the flip side Malco finds it profitable to sell the

power produced to the state grid.

The core players such as Hindalco and Nalco are producing at an average marginal

cost of $1450/tonne and $1500/tonne respectively. Both these companies are just

able to keep their neck above the water and do not anticipate any production-cuts in

near future as long as LME Aluminium is above $1500/tonne. Also, these companies

are going ahead with their capex plans for FY09E due to expectations of sustained

domestic demand. Going forward any further fall in aluminium price can be alarming

for Indian aluminium players also.

Production and Sales volume data of Indian players for H1 FY09E

Companies Alumina Aluminium

Production Sales Production Sales

Volumes-MT Volume-MT Volumes-MT Volume-MT

Nalco* 766400 426000 179324 175000

Hindalco 255199 268924

Sterlite Ind( Incl. Balco & Malco) 178211 172660

Note*: Nalco is only Indian player that is exporting Alumina.


Note: Total global Aluminum output cut for CY09 is expected to be 6.8 million tonne.

Source: Reliance Money Research /

Global Output cuts in CY09

Contd...

Companies Delay in capex plans

Alcoa & Alumina Indefinite delay in expansion of US$3 Billion worth of Wagerup

alumina refinery in Western Australia

Rio Tinto Delay in establishing US$ 11 Billion smelter in Saudi Arabia.


Delay in Capex plans by global players

Madras Aluminium Company Ltd, which

belongs to Vedanta Group, has

temporarily shut down its 40,000 tonne

of aluminium production.

48%

25%

11%

2%

9%

2%

0%

2%

1%

Chalco Chinese Small Aluminium Producers

Others Global Players Alcoa

Vimetco US Rusal

Vale Vedanta

Norsk Hydro


6/13

6

13th January 2009

Indian aluminium players- Hindalco, Nalco & Sterlite have exhibited 98% as ratio of

sales to production for total Indian aluminium industry in H1 FY09E thus reflecting the

strong domestic demand. Total Indian industry's production has increased by 8%,

while sales volume has registered a jump of 12% as compared to pervious year of the

same half year.

Indian aluminium production has marginally exceeded consumption till CY07, thus

reflecting sustained domestic demand. We expect a small surplus in the Indian

domestic production-consumption. Indian aluminium industry is highly consolidated

and it is a price taker- not a price marker. Indian Aluminium Industry is priced at LME

plus a small premium. Most of players in this industry have an average cost ofproduction of approximately $1500/tonne.

Source: Crisil/ Reliance Money Research

Production and consumption scenario in Indian Aluminium Industry

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

1,300,000

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008E

2009E

tonne

Prod. Consump.

The India advantage

India has historically been a net exporter though in small quantities but is expected to

be net exporter of Aluminium from FY09E onwards with exports growing to as high as

1 mn tonne by FY2013 as the Aluminium supply is expected to exhibit a double digit

growth in coming years while the demand is expected to grow at higher single digit.


Sector wise Consumption Of Aluminium (2007)

Contd...

4%

8%

6%

11%13%

22%

36%

12%

15%

22%

29%

4%

9%9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Tran

sports

Constru

ctio

ns

Packagin

g

Electri

cal

Engine

erin

g

Con.

Durables

Oth

ers

India World

Indian Aluminium Industry is priced at

LME plus a small premium. Most of

players in this industry have an average

cost of production of approximately$1500/tonne.


7/13

7

13th January 2009

Aluminium Metal Balance for India

Capacity (kT) 2006-07 2007-08E 2008-09P 2009-10P 2010-11P 2011-12P 2012-13P

Nalco 345 357 370 460 470 470 585

Malco 40 40 40 40 40 40 40

Balco 345 350 600 850 850 850 850

Vedanta Aluminium - - - 250 500 500 500

Hindalco 461 471 539 539 539 864 1223

Total Capacity 1191 1218 1549 2139 2399 2724 3198

Total Production 1150.07 1234.54 1421.10 1833.00 2174.00 2511.50 2953.50

Total Demand 1118.73 1261.41 1374.9 1498.68 1633.56 1780.57 1940.83

Net Exportable surplus 31.35 (26.86) 46.18 334.33 540.44 730.9 1012.67


Indian aluminium producers are amongst the lowest cost producers of the metal in the

world, which is a significant advantage, especially during times of cyclical downturns.

Abundant bauxite reserves and access to cheap labour have given the domestic

aluminium manufacturers an edge over their international peers.

Despite the current slowdown faced globally and corrected LME prices, Indian

Aluminium Majors are sticking to their current expansion plans. As per the current

capex plans, the Aluminium production capacity of India will double to 2.7 mn tonne

per annum by FY12E and 3.2 mn tonne by FY13E.

Future Outlook of Aluminium IndustryLME Aluminium prices are a function of the International demand and supply. We

expect North America, Europe, Asia (less China),Australia, Africa, East Europe and

Japan to exhibit a flat growth rate while China, CIS and Middle East countries to show

a drop in growth rate of Aluminium consumption. The overall Aluminium demand is

expected to rise by just 2.6% for CY09E as against 3.9% growth for CY08E and 7.4%

growth for CY07.

The current Aluminium prices are below the cost of production of almost 70% of the

producers in the world. The process of production cuts has already started as the

selling price is quoting below the cost of production. Chinese production and supply

of Aluminium has an extended effect on the Global demand supply equation. As on

the day China is on way to reduce about 26% of its production capacity which is

equivalent to 4 mn tonne. This production cut falls short by just 0.6 mn tonne of the

expected metal surplus in CY09 (calculated above before accounting for the supply

cuts), which would then be negated due to this supply cut from China only. This capacity

shut down may resume production if the LME Aluminium prices quote in the vicinity of

$2000/tonne. Hence, the net surplus is expected at the exchanges that will keep the

LME prices subdued for the CY09.

China Aluminium Capacity Reduction

Smelters Curr. Capacity Reduction in Capacity Operating

(mn tonne) (mn tonne) Ratio

Central China 4.37 1.4 32.0%

North West China 2.89 0.41 14.2%

East China 2.65 0.56 21.1%

North China 2.5 0.69 27.6%

South West China 2.26 0.78 34.5%

South China 0.58 0.11 19.0%

North East China 0.18 0.1 55.6%Total 15.43 4.05 26.2%

Source:Reliance Money Research

Contd...

Indian aluminium producers are

amongst the lowest cost producers of

the metal in the world, which is a

significant advantage, especially duringtimes of cyclical downturns.

The overall Aluminium demand is

expected to rise by just 2.6% for CY09E

as against 3.9% growth for CY08E and

7.4% growth for CY07.


8/13

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13th January 2009

A survey of 35 Aluminium plate producers showed that the operating ratio of these

producers has been dropping for last three months.

Survey of 35 Aluminium plate producers in ChinaCapacity (mn tonne) No. of Total capacity Oct Avg Nov. Avg. Dec. Avg

manufactures (mn tonne) Operating Ratio Operating Ratio Operating Ratio

> 0.1 mn tonne 12 2.17 65.61% 62.70% 54.70%

0.03-.01 mn tonne 16 0.75 58.50% 51.30% 42.10%

< 0.03 mn tonne 7 0.061 77.25% 72.30% 64.80%

35 2.981 64.02% 60.00% 51.70%


Declining Operating ratio for Chinese plate producers - for Oct-Dec 09 qtr

The above graph and the table indicates that the operating ratio has come down all

the way from 64% in Oct.08 to 52% in Dec.08 for the 3 mn tonne of capacity of China

surveyed. The scenario is similar for rest of the producers too.

The final conclusion is that LME Aluminium prices are expected to be in the range of

$1700-$1900 per tonne.

Contd...

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Oct Avg O/R Nov. Avg. O/R Dec. Avg O/R

Opera

ting

Ra

tio(%)

> 0.1 mn tonne 0.03-.01 mn tonne < 0.03 mn tonne Overall

The final conclusion is that LMEAluminium prices are expected to be in

the range of $1700-$1900 per tonne.


9/13

9

13th January 2009

0

100

200

300

400

500

600

Jan-09Nov-08Oct-08Aug-08Jul-08May-08Apr-08Feb-08Jan-08Nov-07Oct-07

0

5000

10000

15000

20000

25000

HOLD

Price: Rs.181

12M Target Price: Rs.191% Upside / (Downside) 5.8%

Nalco

Contd...

Low cost producer


BSE Code 532234

NSE Code NATIONALUM

Reuters Code NALU.BO

Bloomberg Code NACL IN

Market Cap (Rs bn) 1191.007

Free Float (%) 12.85

52-wk Hi/Lo (Rs) 565.9/108.35

Avg Daily Vol (BSE) 164279

Avg Daily Vol (NSE) 555937

Shares o/s (mn) FV Rs 10 644.3

Stock details

Source: Capitaline

NALCO

BSE

Stock Performance (Rel to sensex)


Shareholding pattern (31st Dec 2008)

Nalco locates itself among the first quartile on the cost curve for Aluminium

production across the globe which puts it at advantage against its global peerswho are resorting to production cuts at current LME Aluminium price of $1550/tonne. The company produces and sells both Alumina and Primary metal. It ownscaptive bauxite mines and power plant with dedicated coal supplies. The companyhad some issues with the supply of thermal coal from Mahanadi Coal fields andhence had to procure imported coal at higher prices. The issues regarding thesupply of coal has been sorted out, thus relieving it of higher power costs which isa major cost for the Aluminium producers. The crude oil prices have also comedown which has reduced the cost of calcined petro-coke and coal tar pitch- byproducts of crude oil. These were important contributors for hike in productioncost for last 2 quarters for Nalco. Henceforth, Nalco will continue with its advantageof being a low cost Aluminium producer thus weathering the cyclical downturns.

Expanding capacity:Nalco had embarked on massive expansion plan taking the capacity of Aluminarefinery to 2.1 mn tonne (an increment of 0.525 mn tonne) and Aluminium Smeltingof 0.46 mn tonne (an increase of 0.12 mn tonne) in its 2 nd phase of expansionwhich is expected to be completed in Dec.08 at an expenditure of Rs 40 bn. Withenhanced capacity Nalco would be in position to cash on the rising domesticdemand. The company is moving forward with other domestic expansions viz.third phase at an expense of Rs 60 bn taking the refinery capacity to 3 mn tonneand smelting capacity to 0.58 mn tonne by Dec. 2011, 1.4 mn tonne refinerycomplex at Vizag at capex of Rs 70 bn, 0.5 mn tonne smelting capacity atJharsuguda at expense of Rs 85 bn along with 1260 MW power plant. Nalco hasalso undertaken 2 overseas projects viz. 0.5 mn tpa Smelter with 1250 MW powerplant at Indonesia at the cost of Rs 140 bn and 0.33 mn tpa Smelter in Iran atexpense of Rs 80 bn.

Long term domestic demand to remain bouyantThe consumption pattern of Aluminium in India is different. The largest contributorto Aluminium consumption is Power sector which is expected to feel relativelyless heat following the global meltdown as the sector is marked by governmentspending. Although, the construction and automobile sector is currently reelingunder slowdown, the former is expected to show revival following the fiscal andmonetary steps taken by the Authorities.

Recommend a Hold:Nalco is expected to register a top line of Rs 50.9 bn and Rs 58.1 bn for FY09Eand FY10E and an EPS of Rs 20.5 & Rs 21.3 for FY09E and FY10E respectively.The company is cash rich and can tide over the current fall in LME Aluminiumprices. At CMP of Rs 181/share, the stock is trading at 8.5x FY10E earnings. Werecommend a hold with a price target of Rs 191 (5.8% upside) at which the stockwill quote at 9.35x FY10E earnings.

FII 4%

Financial

Institutions 5%

Promoters 88%

Public 3%

Source: Company / Reliance Money Research

Y/E March FY07 FY08 FY09E FY10E

Revenues 59,556 50,220 50,986 58,129

Rev. Growth (%) 22.68% -15.68% 1.53% 14.01%

EBIDTA 35,800 22,520 19,761 22,954

EBIDTA margins (%) 60.11% 44.84% 38.76% 39.49%

Net Profit 23,680 16,215 13,195 13,703

EPS (Rs.) 36.75 25.17 20.48 21.27

CEPS (Rs.) 41.88 29.68 25.41 29.17

EV/EBIDTA (x) 2.23 3.57 4.76 4.87

EV/Sales (x) 1.34 1.60 1.84 1.92

RoE (%) 33.49% 19.05% 13.84% 13.14%

RoCE (%) 33.49% 19.05% 13.84% 13.14%

P/E (x) @ Rs 181 4.9 7.2 8.8 8.5

P/CEPS (x) @ Rs.181 4.3 6.1 7.1 6.2

Financials Summary Rs. Mn


10/13

10

13th January 2009

Y

Y

Profit & loss statement (Rs mn)

Ratio Analysis

Year to Mar FY07 FY08 FY09E FY10E

Net Sales 59,556 50,220 50,986 58,129

% Growth 22.7% -15.7% 1.5% 14.0%

EBIDTA 35,800 22,520 19,761 22,954

% Growth 38.6% -37.1% -12.3% 16.2%

Interest 459 621 5 0

Depreciation 3171 2811 3177 5089

PBT 36204 24666 20138 20762

% Growth 49.0% -31.9% -18.4% 3.1%

Tax 12390 8351 6943 7059

PAT 23814 16315 13195 13703

% Growth 52.4% -31.5% -19.1% 3.9%

Dividend (%) 75% 60% 60% 60%

EPS (Rs) 37.0 25.3 20.5 21.3

BVPS (Rs.) 119.4 137.7 151.2 165.4


OPM (%) 60.1% 44.8% 38.8% 39.5%

NPM (%) 39.76% 32.29% 25.88% 23.57%

RoE (%) 33.5% 19.1% 13.8% 13.1%

RoCE (%) 33.5% 19.1% 13.8% 13.1%

D/E (x) 0.00 0.00 0.00 0.00

Asset Turnover (x) 1.27 0.90 0.70 0.60

Debtors' days 2 4 5 5

Creditors days 243 394 390 390

Inventory Days 117 113 118 118

Valuation Ratios

P/ CEPS (x) 4.4 6.2 7.3 6.3

EV/ EBIDTA (x) 2.3 3.7 4.9 5.0

Mkt Cap/ Sales (x) 2.0 2.4 2.3 2.1

CEPS (Rs.) 41.9 29.7 25.4 29.2

P/ BV (x) 1.5 1.3 1.2 1.1

Y

Balance sheet (Rs mn)

Cash Flow Statement (Rs mn)


Equity Cap 6443 6443 6443 6443

Reserves 70509 82301 90973 100153

Net worth 76952 88745 97416 106596

Total Loans 0 0 0 0

Deferred Tax Liability 6127 6074 5137 5789

Total Liability 6127 6074 5137 5789

Net Block 37121 35318 49463 81198

Investments 0 1150 2150 3150

Inventory 6350 6867 8037 9229

Debtors 341 607 764 873

Cash Balance 36865 35165 20452 1776

Total Current Liabilities 12186 15409 16793 19397

NCA 37555 35005 18368 -1042

Total Assets 83080 94819 102553 112385


PAT 23814 16315 13195 13703

Depreciation 3171 2811 3177 5089

Change in WC 951 850 1924 734

Operating CF 27936 19976 18296 19526

Capex -6823 -17121 -27414 -34331

Misc. Exp -107 20 -133 0Investing CF -6930 -17100 -27547 -34331

Equity -230 0 0 0

Deferred Tax Liability -290 -53 -938 652

Dividends -5558 -4523 -4523 -4523

Debt 0 0 0 0

Financing CF -6078 -4576 -5461 -3871

Net Change 14928 -1701 -14713 -18676

Opening Cash 21937 36865 35165 20452

Closing Cash 36865 35165 20452 1776


H109 Performance


(Rs Mn) H109 H108 % Change (YoY)

Sales Volume (tonne) 175000 171776 1.9%

Revenue 30,390 24,734 22.9%

EBIDTA 14,127 9,091 55.4%

EBIDTA Margin (%) 46.5% 36.8% 9.7%

Interest 5 7 -35.2%

Depreciation 1,375 1,375 -

PBT 14,840 13,421 10.6%

Tax 5,142 4557 12.8%

PAT 9,698 8,864 9.4%NPM (%) 31.9% 35.8% -3.9%

Adjusted EPS 15.1 13.8


11/13

11

13th January 2009

Price: Rs.50

Hindalco

Contd...

Source: Company / Reliance Money Research

Y/E March FY07 FY08 FY09E FY10E

Revenues 186,831 196,940 175,411 140,306

Rev. Growth (%) 60.50% 5.41% -10.93% -20.01%

EBIDTA 40,150 34,011 30,378 28,516

EBIDTA margins (%) 54.12% -15.29% -10.68% -6.13%

Net Profit 25,643 28,609 21,202 19,710

EPS (Rs.) 24.58 27.42 12.44 11.56

CEPS (Rs.) 30.70 33.06 16.21 15.50

EV/EBIDTA (x) 2.28 3.94 4.41 4.70

EV/Sales (x) 0.49 0.68 0.76 0.95

RoE (%) 23.08% 19.09% 10.16% 7.78%

RoCE (%) 15.90% 13.69% 7.75% 6.24%P/E (x) @ Rs 50 2.0 1.8 4.0 4.3

P/CEPS (x) @ Rs.50 1.6 1.5 3.1 3.2

Financials Summary Rs. Mn

Highly leveraged Balance sheet:


BSE Code 500440

NSE Code HINDALCO

Reuters Code HALC.BO

Bloomberg Code HNDL.IN

Market Cap (Rs bn) 894.568

Free Float (%) 64.81

52-wk Hi/Lo (Rs) 210.4/38.05

Avg Daily Vol (BSE) 2837013

Avg Daily Vol (NSE) 6924902

Shares o/s (mn) FV Rs 1 1705

Stock details

Source: Capitaline

Hindalco

BSE

Stock Performance (Rel to sensex)


Shareholding pattern (30th Sept 2008)

Hindalcos acquisition of Canadian Aluminium major Novelis in May 07 for thepurchase consideration of $6.1 bn (including the $2.4 bn debt of Novelis) has left

the former high and dry. The acquisition was made when both the economy and

the metal cycle were riding upwards. In the current scenario, when the Aluminium

prices have come all the way down to $1500/tonne which is marginally above the

cost of production and the demand dropped, the loss making acquisition is a drag

on the financial statements.

Novelis turning into profit making venture has been deferred

by a year:

It was expected that Novelis will make profit from FY10E after the metal prices

ceiling contracts are expired but the current base metal meltdown following the

financial mess has pushed the probable turnaround of the company by more than

a year. We expect Novelis to turnaround not before FY13E. Till that time, the

Canadian company will be a drag over the consolidated balance sheet, although

it may reduce with passage of time. Novelis derives 46% of its revenues from

beverage industry mainly located in American and European Continent, 18% from

construction and Industrial segment, 17% from foils and packaging and 9% from

transport. With these areas under deep recession the demand for the product is

expected to fall drastically.

Hindalco Standalone to benefit from falling Copper prices but loose due to crashing

Aluminium prices: Hindalco- being a standalone smelter will benefit in future due

to rising treatment and refining charges ( due to fall in mined copper concentrate)but will be affected due to fall in the Aluminium prices as Aluminium had contributed

80% of Standalone profit for FY08.

Hindalco (St.) is expected to report a Sales of Rs 175.4 bn (a YoY decline of 11%)

and Rs 140.3 bn (a cut of 20% (YoY)) for FY09E and FY10E and an EPS of Rs

12.4 and Rs 11.56 respectively for FY09E and FY10E. At the CMP of Rs 50, the

Standalone entity is quoting at 4.3x FY10E earnings. The picture is a bit hazy

about the performance of Novelis and Aditya Birla Minerals Ltd. Hence, we currently

refrain ourselves from giving any recommendation on the stock and will come

with a review and the price target post the Q309 results for these subsidiaries.

The following numbers are for the Standalone entity.

Public 33%

Promoters 35%Financial

Institutions 17%

FII 15%

0

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13th January 2009

Y

Y

Profit & loss statement (Rs mn)

Ratio Analysis


Total Sales 186,831 196,940 175,411 140,306

% Growth 60.5% 5.4% -10.9% -20.0%

EBIDTA 40,150 34,011 30,378 28,516

EBIDTA margins 21.9% 17.7% 18.1% 21.4%

Interest 2424 2806 3364 3108

Depreciation 6380 5878 6434 6726

PBT 35046 30256 27820 25934

% Growth 66.4% -13.7% -8.1% -6.8%

Tax 9403 1647 6617 6224

PAT 25643 28609 21202 19710

% Growth 54.9% 11.6% -25.9% -7.0%

Dividend (%) 170% 184% 62% 58%


OPM (%) 21.9% 17.7% 18.1% 21.4%

NPM (%) 13.73% 14.53% 12.09% 14.05%

RoE (%) 23.1% 19.1% 10.2% 7.8%

RoCE (%) 15.9% 13.7% 7.8% 6.2%

Int. Coverage (x) 16.56 12.12 9.03 9.18

D/E (x) 0.59 0.48 0.36 0.34

Asset Turnover (x) 1.62 1.50 1.18 0.84

Creditors' days 79 62 90 90

Debtors' days 30 30 35 40

Inventory Days 116 124 143 153

Valuation Ratios

P/ CEPS (x) 1.7 1.6 3.3 3.4

EV/ EBIDTA (x) 2.4 4.0 4.5 4.8

Mkt Cap/ Sales (x) 0.3 0.3 0.5 0.6

CEPS (Rs.) 30.7 33.1 16.2 15.5

P/ BV (x) 0.4 0.3 0.4 0.3

Y

Balance sheet (Rs mn)

Cash Flow Statement (Rs mn)


Equity Cap 1043 1231 1705 1705

Reserves 123137 171737 241671 260247

Net worth 124180 172967 243376 261952

Total Loans 73686 83286 88286 88786

Deferred Tax Liability 11258 13237 12017 12724

Total Liability 209124 269490 343678 363462

Net Block 70067 78093 95781 120622

Investments 86753 141080 142080 143080

Inventory 43153 50979 45932 34640

Debtors 15045 15650 16126 14581

Cash Balance 6655 1470 66928 63406

Total Current Liabilities 40275 39399 44825 36946

NCA 37508 39118 95302 87036

Total Assets 209124 269490 343678 363462


PAT 25643 28609 21202 19710

Depreciation 6380 5878 6434 6726

Change in WC 1474 -6795 9273 4744

Operating CF 33498 27693 36910 31180

Capex -61791 -64288 -24438 -34776

Misc. Exp -275 -346 0 0

Investing CF -62066 -64634 -24438 -34776

Equity 4497 22832 50426 0

Others -1076 1979 -1220 708

Dividends -2022 -2655 -1219 -1134

Debt 24652 9600 5000 500

Financing CF 26051 31756 52986 74

Net Change -2518 -5185 65458 -3522

Opening Cash 9173 6655 1470 66928

Closing Cash 6655 1470 66928 63406

* Adjusted for bonus and split. Source: Reliance Money Research

H109 Performance


(Rs Mn) H109 H108 % Change (YoY)

Sales Volume (tonne) 268924 226433 18.8%

Revenue 103,307 96,376 7.2%

EBIDTA 19,424 18,060 7.6%

EBIDTA Margin (%) 18.8% 18.7% 0.1%

Interest 1,616 1,194 35.4%

Depreciation 3,160 2,874 9.9%

PBT 18,563 16,336 13.6%

Tax 4,396 3,879 13.3%

PAT 14,167 12,457 13.7%

NPM (%) 13.7% 12.9% 0.8%

Adjusted EPS 11.6 19.3 -


13/13

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13th January 2009

DISCLAIMER: This document has been prepared by Reliance Money Limited, Mumbai and is to be used by the recipient and not to be circulated. The information

provided should not be reproduced, distributed or published, in whole or in part without prior permission from the company. The information and the opinions

contained in the document have been compiled from source believed to be reliable. The company does not warrant its accuracy, completeness and correctness.

This document is not and should not be construed as an offer to sell or solicitation to buy any securities.

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Rating Stock Performance

BUY Appreciate more than 15% in next 12 months

HOLD Appreciate upto 15% in next 12 months

REDUCE Depreciate upto 10% in next 12 months

SELL Depreciate More than 10% in next 12 months

Reliance Money Stock Rating

aluminium sector update - rel money - 13 01 09

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