1. business and industrial
2. energy
3. coal

India Equity Research Metals March 2, 2015
Hindalco Industries BUY Target price (INR) 204 Higher coal procurement cost to raise COP; maintain Buy Company report Last Price (INR)
152.9
Bloomberg code
HNDL IN
Reuters code
HALC.BO
Avg. Vol. (3m)(mn)
8.15
Avg. Val.(3m)(INRbn)
1.24
52‐wk H/L (INR)
199 / 98.6
29,362
Sensex
MCAP (INRbn/USDbn)
315.63 / 5.12
Shareholding (%)
09/14
12/14
Promoters
37.0
37.0
MFs, FIs, Banks
11.8
12.7
FIIs
29.5
28.9
Public
Others
7.0
14.7
6.9
14.5
Stock Chart (Relative to Sensex)
200
170
Procurement of 2.8mn tonnes of coal in the recent coal block auctions is likely to meet c25% of HNDL’s total coal requirement of c11.4mn tonnes (based on the calorific value of coal procured from these mines). However, the price of the coal procured under auction is likely to be higher than the e‐auction coal prices; hence, we have raised our FY16f–FY17f coal cost estimates by 10%, leading to a decline of up to 10.7% in our FY16f–FY17f estimates. We thereby cut our Dec15 TP to INR204, whereas we maintain a Buy rating, as coal procurement through auctions provides certainty of ramping up the capacity utilisation at the Mahan and Aditya smelters to its optimal level by the end of FY17f. Coal blocks procured through auction to meet 25% of requirements Procurement of 2.8mn tonnes of coal through the acquisition of three coal mines in the recent auction is likely to meet c25% of HNDL’s requirement. Adjusted for the calorific value, the price of the coal procured under the auction on a blended basis is likely to raise the coal cost by 10% compared to our earlier estimates. Based on the calorific value of coal procured, we estimate the total requirement to be c11.4mn tonnes, but it is likely to increase to c15mn tonnes if the incremental coal procured are of a low calorific value. Mahan, Aditya to secure coal from Kathautia, Gare Palma – IV 140
110
80
Feb14
Jun14
Oct14
Hindalco Inds.
Feb15
Sensex Rebased
The Kathautia Coal Block with a capacity of 0.8mn tonnes is likely to supply coal to the Mahan Power Plant, generating c240MW of power from its installed capacity of 900MW and it is at a distance of 222km from the mine. The Gare Palma – IV/4/5 Coal Block with a combined capacity of 2mn tonnes is likely to generate c500MW of power and is at a distance of 181km from the Aditya Aluminium Smelter and 140km from the Hirakud Smelter. We believe the coal mining cost, including royalty from these mines, to be at the cINR1,500/tonne. Stock Perfm. (%)
1m 3m 1yr Mahan, Aditya to operate at full capacity by FY17f on coal certainty Absolute
9.4
‐12.2
45.1
Rel. to Sensex
8.6
‐15.4
6.1
Availability of coal through the three coal blocks of 2.8mn tonnes is likely to provide certainty in terms of coal availability for HNDL. We thereby, remain confident of both these new capacities to reach its optimum utilisation of 359,000 tonnes each by the end of FY17f, as the company procures the balance coal requirement through e‐auctions. Procurement of coal for the Renusagar Power Plant will continue to be through linkages, whereas the Hirakud Power Plant is likely to procure coal through e‐auctions. Financials (INRmn)
Sales
03/14
03/15f
03/16f
876,955
1,012,535
1,107,787
YoY (%)
9
15
9
8.7
10.2
11.0
21,282
36,030
43,794
2,065
2,065
2,065
A.EPS (INR)
9.4
15.3
18.5
YoY (%)
‐38
63
22
1.2
EBITDA (%)
A.PAT
Sh o/s (diluted)
D/E (x)
1.6
1.3
P/E (x)
16.3
10.0
8.2
EV/E (x)
12.4
8.8
7.3
4
5
5
7
6
8
RoCE (%)
RoE (%)
Quarterly Trends 03/14
06/14
09/14
12/14
Sales (INRmn)
84,351
79,961
85,543
86,031
PAT (INRmn)
2,482
3,275
788
3,594
Please refer to the disclaimer towards the end of the document. Estimates: Cut EBITDA by up to 5.3% and net profit by 10.2% We have cut our FY16f–FY17f EBITDA and net profit estimates by up to 5.3% and 10.2%, respectively. The cut in earnings has been due to the 15% rise in coal cost estimates compared to our earlier estimates of a 5% increase and a hike in the coal cess from INR100/tonne to INR200/tonne. Maintain Buy; cut Dec15 TP to INR204 We value HNDL at the consensus historical three‐year average EV/EBITDA of 7.1x and P/E of 8.4x to arrive at our Dec15 TP of INR204. Key risks include the lower‐than‐estimated ramp up of new capacity and fall in aluminium prices. Jimesh Sanghvi, +91 22 66842859 [email protected] Hindalco Industries
Secures 2.8mn tonnes of its total requirement of c11.4mn tonnes Procurement of 2.8mn tonnes of coal through the acquisition of three coal mines in the recent auction is likely to meet c25% of HNDL’s requirement based on the coal, which is likely to be of similar grade procured through auction. However, adjusted for the calorific value, the price of the coal procured under the auction is higher than the e‐auction or the linkage coal, which could be procured from Coal India. With the likely rise in coal prices, being inflation adjusted, we are likely to see an ongoing increase in the captive coal prices in the foreseeable future. The coal requirement is likely to be c15mn tonnes higher than our estimates of c11.4mn tones, if the incremental coal procured are of a low calorific value. The higher‐than‐estimated coal cost from captive coal and the increase in coal cess from INR100/tonne to INR200/tonne in the Budget has led us to raise our coal cost estimate by up to 10% for FY16f–FY17f. However, coal procurement through these coal blocks has led to more certainty in terms of meeting coal requirement to ramp up the utilisation of smelter capacities at Mahan and Aditya to more than 90% by the end of FY17f. Exhibit 1: Captive power plant Power plant Capacity Coal required Captive (MW) (mn tonnes)
coal Linkage/ e‐auction Gross calorific
value ‐Avg. Remarks Renusagar 742.0 4.5 ‐ 4.5 3,200 Linkage from Coal India Hirakud 367.5 1.8 ‐ 1.8 3,600 E‐auction Aditya 900.0 2.8 2 0.8 4,800 Likely to be procured from Gare Palma IV/4/5
Mahan 900.0 2.3 0.8 1.5 5,800 Likely to be procured from Kathautia mine 2,909.5 11.4 2.8 8.6 Total Source: Company, IL&FS Institutional Equities The total coal required for the total of 2,909.5MW of captive power generation capacity is estimated to be c11.4mn tonnes based on the calorific value of coal mentioned above. Of the above, 2.8mn tonnes of coal are likely to be available from the Gare Palma – IV/4/5 and Kathautia mines for the captive power plants at Aditya Aluminium and Mahan. The balance coal requirements at these two power plants are likely to be met through e‐auctions. Coal requirement for the Hirakud Captive Power Plant of 367.5MW is likely to be met through e‐auction, whereas the 742MW captive power plant at Renusagar has existing coal linkages from Coal India, which is likely to continue in the foreseeable future. Assuming the coal procured through e‐auction for the Aditya and Mahan power plants is of lower calorific value, then our assumption of HNDL’s total coal requirement can increase to c14mn–15mn tonnes. Exhibit 2: Distance from Mand – Raigarh Gare Palma – IV/4/5 to Hirakud & Aditya Aluminium Source: Google Maps, IL&FS Institutional Equities Aditya Aluminium’s power plant has been at a distance of 180km from the Gare Palma – IV/4/5 mines at Mand ‐ Raigarh, Chhattisgarh. These two mines have been procured in an auction at an average cost Metals 2 Hindalco Industries
of INR3,250/tonne and we estimate the mining cost, including royalty, to lead to a landed cost of cINR4,750/tonne at the power plant. This is likely to be higher than the coal procured through the e‐
auction at the cost of INR3,500/tonne. However, we believe availability of coal is likely to provide the company an opportunity to ramp up its 359,000 tonnes capacity to its full utilisation by FY17f. Exhibit 3: Distance from Kathautia, Daltonganj Coal Field to Mahan Power Plant Source: Google map, IL&FS Institutional Equities Mahan’s power plant has been at a distance of 222km from the Daltonganj coal mines in Jharkhand. The mine’s capacity stands at 0.8mn tonnes and the average calorific value of coal produced from these mines is likely to be 5,800Kcal/kg. The coal produced from this coal block is likely to have an average landed cost of INR4,360/tonne (including the auction price and the mining cost + royalty). Landed coal procured from this coal block is c10% higher than cost of linkage coal procured from Coal India. However, low mining capacity is likely to drive HNDL to procure c1.5mn tonnes of similar grade coal or 1.9mn tonnes of low‐grade coal (GCV – 4,600 Kcal/kg) from e‐auctions to operate the power plant and smelter, which require 359,000 tonnes at full capacity. Cut FY16f–FY17f estimates to account for higher coal cost We have raised our FY16f–FY17f coal cost estimates by 10% to account for the higher‐than‐estimated coal cost for the 2.8mn tonnes of coal procured through the auctioning of blocks. This has led us to cut our FY16f–FY17f EBITDA and net profit estimates by up to 5.3% and 10.2%, respectively. Exhibit 4: Consolidated earnings revision summary (INRmn) Revenue EBITDA EBIT PBT PAT EPS (INR) ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ FY15f ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Old New Var (%) 1,012.5 102.9 80.5 46.5 36.0 15.3 1,012.5 102.9 80.5 46.5 36.0 15.3 0.0
0.0
0.0
0.0
0.0
0.0
‐‐‐‐‐‐‐‐‐‐‐‐‐‐ FY16f ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Old New Var (%) 1,107.8
125.7
99.1
60.2
46.7
19.8
1,107.8
122.0
95.4
56.5
43.8
18.5
0.0
‐2.9
‐3.7
‐6.1
‐6.1
‐6.1
‐‐‐‐‐‐‐‐‐‐‐‐‐ FY17f ‐‐‐‐‐‐‐‐‐‐‐‐‐ Old New Var (%) 1,184.1 146.6 116.3 75.4 58.4 24.7 1,184.1
138.9
108.6
67.7
52.4
22.2
0.0
‐5.3
‐6.6
‐10.2
‐10.2
‐10.2
Source: IL&FS Institutional Equities Maintain Buy; cut Dec15 TP to INR204 We value HNDL at the consensus historical three‐year average EV/EBITDA of 7.1x and P/E of 8.4x to arrive at our Dec15 TP of INR204. Key risks include the lower‐than‐estimated ramp up of new capacity and fall in LME aluminium prices. Metals 3 Hindalco Industries
Exhibit 5: One‐year forward P/E (x) Exhibit 6: One‐year forward EV/EBITDA (x) 22.0
9.0
17.0
8.0
12.0
7.0
7.0
6.0
Consensus P/E (x)
2.0
Jan09
Mar10
May11
Consensus EV/EBITDA (x)
Average (Mar12–Feb15)
Mar10
Sep13
Average (Mar12–Feb15)
Jul12
Source: Bloomberg, IL&FS Institutional Equities Sep13
Oct14
Dec15
5.0
Jan09
May11
Jul12
Nov14
Dec15
Source: Bloomberg, IL&FS Institutional Equities Metals 4 Hindalco Industries
Financials and valuations Income statement (INRbn)
Cash flow statement (INRbn)
Fiscal year ending
Total operating income
Total operating expenses
EBITDA
Other income
Depreciation
EBIT
Interest
Recurring PBT
Net extra ordinary items
PBT (reported)
Total taxes
PAT (reported)
(+) Share in assoc. earnings
Less: Minority interest
Prior period items
Net income (reported)
IL&FS net income
Shares outstanding (mn)
IL&FS dil. shares (mn)
IL&FS EPS (INR)
03/14
877.0
800.4
76.5
10.2
35.5
51.2
27.0
24.2
2373.8
2398.0
5.2
2392.7
0.0
‐0.5
0.0
21.8
19.4
2,065
2,065
9.4
03/15f
1012.5
909.6
102.9
10.4
32.9
80.5
34.0
46.5
0.0
46.5
10.5
36.0
0.0
4.5
0.0
31.5
31.5
2,065
2,065
15.3
03/16f
1107.8
985.8
122.0
10.7
37.3
95.4
38.9
56.5
0.0
56.5
12.7
43.8
0.0
5.5
0.0
38.3
38.3
2,065
2,065
18.5
03/17f
1184.1
1045.2
138.9
11.0
41.2
108.6
41.0
67.7
0.0
67.7
15.2
52.4
0.0
6.6
0.0
45.9
45.9
2,065
2,065
22.2
9.4
‐0.7
‐12.7
‐36.1
‐33.2
‐38.0
15.5
34.5
57.3
92.4
62.6
62.6
9.4
18.6
18.6
21.5
21.5
21.5
6.9
13.8
13.8
19.7
19.7
19.7
8.7
5.8
2.2
42.1
19.8
10.2
7.9
3.1
22.4
22.5
11.0
8.6
3.4
18.9
22.5
11.7
9.2
3.8
16.2
22.5
03/14
21.8
35.5
0.0
14.1
10.2
61.2
‐164.0
‐3.6
0.0
0.0
0.0
10.2
‐157.4
21.7
70.6
‐2.4
19.8
109.6
13.4
03/15f
31.5
32.9
0.0
‐3.1
10.4
50.9
‐42.4
25.9
0.0
0.0
0.0
10.4
‐6.0
0.0
‐26.5
‐2.4
4.5
‐24.4
20.4
03/16f
38.3
37.3
0.0
‐5.7
10.7
59.2
‐50.0
0.0
0.0
0.0
0.0
10.7
‐39.3
0.0
‐12.1
‐2.4
5.5
‐9.0
10.8
03/17f
45.9
41.2
0.0
‐3.8
11.0
72.3
‐50.0
0.0
0.0
0.0
0.0
11.0
‐39.0
0.0
‐14.8
‐2.4
6.6
‐10.6
22.6
03/14
03/15f
03/16f
03/17f
Key Ratios
Growth ratios (%) Total operating income
EBITDA
EBIT
Recurring PBT
IL&FS net income
IL&FS EPS
Operating ratios (%) EBITDA margin
EBIT margin
Net profit margin
Other income/PBT
Effective Tax rate
Balance sheet (INRbn)
Fiscal year ending
Equity capital
Preference capital
Reserves and surplus
Net worth
Minority interest
Total debt
Deferred tax liability
Total liabilities
Gross block
less: Acc. depreciation
Net block
CWIP
Goodwill
Investments
Cash
Inventories
Debtors
Loans and advances
less: Current liabilities
less: Provisions
Net working capital
Total assets
Fiscal year ending
Net profit
Depreciation
Deferred tax
Working capital changes
Less: Other income
Cash flow from operations
Capital expenditure
Strategic investments
Marketable investments
Change in other loans & adv.
Goodwill paid
Other income
Cash flow from investing
Equity raised
Change in borrowings
Dividends paid (incl. tax)
Others
Cash flow from financing
Net change in cash
03/14
2.1
0.0
404.0
406.0
17.8
631.1
31.8
1,086.7
879.1
267.5
611.6
242.1
0.0
129.6
51.2
166.9
99.1
79.3
217.6
75.5
103.4
1,086.7
03/15f
2.1
0.0
433.1
435.1
22.3
604.6
31.8
1,093.8
1,000.2
300.4
699.8
163.4
0.0
103.7
71.6
166.4
111.0
81.6
221.9
81.9
126.9
1,093.8
03/16f
2.1
0.0
469.0
471.0
27.8
592.4
31.8
1,123.0
1,131.9
337.7
794.2
81.7
0.0
103.7
82.4
182.1
121.4
87.3
241.1
88.7
143.5
1,123.0
03/17f
2.1
0.0
512.4
514.5
34.4
577.6
31.8
1,158.2
1,222.7
378.9
843.8
40.9
0.0
103.7
105.1
194.6
129.8
91.9
257.4
94.1
169.9
1,158.2
Fiscal year ending
Valuation ratios (x)
P/E (on IL&FS EPS)
P/E (on basic, reported EPS)
P/CEPS
P/BV
Dividend yield (%)
Market cap. / Sales
EV/Sales
EV/EBITDA
Net Cash / Market cap.
Per share ratios (INR)
IL&FS EPS
EPS (Basic, reported)
Cash EPS
Book Value
Dividend per share
Total assets / equity (x)
Return ratios (%)
ROCE ROIC
ROE
ROA
OCF/Sales
FCF/Sales
Turnover ratios (x)
Asset turnover (x)
Gross asset turnover
Inventory / Sales (days)
Receivables (days)
Payables (days)
Working capital cycle (days)
Solvency ratios (x)
Gross debt to equity
Net debt to equity
Net debt to EBITDA
Interest Coverage (on EBIT)
16.3
14.0
5.8
0.8
10.0
10.0
4.9
0.7
8.2
8.2
4.2
0.7
6.9
6.9
3.6
0.6
0.7
0.4
1.1
12.4
16.2
0.7
0.3
0.9
8.8
22.7
0.7
0.3
0.8
7.3
26.1
0.7
0.3
0.7
6.2
33.3
9.4
10.9
26.6
196.7
1.0
2.7
15.3
15.3
31.2
210.7
1.0
2.6
18.5
18.5
36.6
228.1
1.0
2.4
22.2
22.2
42.2
249.2
1.0
2.3
4.0
6.0
5.1
1.9
6.7
‐12.0
5.3
7.0
7.5
2.9
5.0
0.8
6.2
7.5
8.5
3.5
5.3
0.8
6.8
7.9
9.3
4.0
6.1
1.9
0.9
1.0
64.6
40.8
117.8
24.7
0.9
1.0
60.1
37.9
117.6
19.4
1.0
1.0
57.4
38.3
113.6
19.2
1.0
1.0
58.1
38.7
115.5
19.4
1.7
1.6
8.2
1.9
1.5
1.3
5.9
2.4
1.4
1.2
4.9
2.5
1.3
1.0
4.2
2.7
Metals 5 Hindalco Industries
Analyst Certification The following analyst(s) is(are) primarily responsible for this report and, certifies(y) that the opinion(s) on the subject company(ies) and its security(ies) and any other views or forecasts expressed herein accurately reflect their personal view(s): Jimesh Sanghvi Disclosures Meaning of IL&FS Broking Services Private Limited’s equity research ratings The rating represents the expected change in the price of the stock over a horizon of 12 months. Buy: more than +15% Add: +5% to +15% Reduce: ‐5% to +5% Sell: less than ‐5% Analyst disclosures None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the company(ies) that is/are the subject of this research report. None of the analysts involved in the preparation of this research report or members of his/her household hold any financial interest in the securities of the company(ies) that is/are the subject of this research report. Disclaimer This document has been prepared by IL&FS Broking Services Private Limited (IBSPL) formerly known as Avendus Securities Private Limited. This document is meant for the use of the intended recipient only. Though dissemination to all intended recipients is simultaneous, not all intended recipients may receive this document at the same time. This document is neither an offer nor solicitation for an offer to buy and/or sell any securities mentioned herein and/or official confirmation of any transaction. This document is provided for assistance only and is not intended to be, and must not be taken as, the sole basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as he deems necessary to arrive at an independent evaluation, including the merits and risks involved, for investment in the securities referred to in this document and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This document has been prepared on the basis of information obtained from publicly available, accessible resources. IBSPL has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to accuracy, completeness or fairness of the information and opinion contained in this document. The information given in this document is as of the date of this document and there can be no assurance that future results or events will be consistent with this information. 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In order to provide complete transparency to our clients, we have incorporated disclosures about interests of analysts and about potential conflicts of interest of IBSPL and its associate companies in this document. This should, however, not be treated as an endorsement of the view expressed in the document. IBSPL is committed to providing high‐quality, objective and unbiased research to our investors. To this end, we have policies in place to identify, consider and manage potential conflicts of interest and protect the integrity of our relationships with investing and corporate clients. Employee compliance with these policies is mandatory. Any comment or statement made herein are solely those of the analyst and do not necessarily reflect those of IBSPL. OFFICE ADDRESS IL&FS Broking Services Private Limited
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Metals 6