hindalco industries - myirisbreport.myiris.com/sihl/hinindus_20110621.pdfcompany background-...

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Hindalco Industries 21 st June 2011 1 | Page Initiating Coverage Steady prices backed by robust demand and supply shortfall Copper price is expected to remain steady backed by huge demand from the consumer industry and supply concern. Demand from China is expected to remain strong, but may witness some softening due to the hike in interest rates impacting the growth in industrial activities. The reconstruction activities post tsunami in Japan will also increase demand for copper. With major copper miners cutting down their output in the recent times, copper supply is likely to remain tight. New capacity addition to restrict the rise in aluminium prices Aluminium price rose to $2644/ton in June 2011 after hitting a low of $1930 in June last year. Aluminium price has been on traction with demand outpacing supply in spite of large stockpile lying in LME inventory. The strong aluminium price can be attributed to the number of finance deals which have tied up a huge aluminium stocks keeping it away from the physical market. However, new capacity addition in Middle East and China will keep a check on the aluminium price. We expect LME aluminium price to remain in the range of $2500-2550 in FY12 and FY13. Capacity expansion will drive growth in top line from FY13 Hindalco has laid down a massive expansion plan to treble its capacity by FY16. However, the construction activity has been hindered by several reasons delaying the commissioning of new capacities. The company expects Mahan smelter (capacity 359 KTPA (Thousand Tonnes Per Annum)) to commission in Q3 FY12 and the refining plant in Utkal (capacity 1500 KTPA) to start production by Q2 FY13. The new capacity coming on stream will drive FY13 top line and the full impact of the new capacity will be visible from FY14 onwards. Novelis turnaround Novelis has reported improved performance since Hindalco has acquired it and in FY11 it has reached the much coveted target of adjusted EBITDA of $1 billion. Hindalco has levered the balance sheet of its Canadian subsidiary in FY11 which has been instrumental for the payment of $1.7 billion by Novelis as a return of capital to Hindalco. We believe that going forward Novelis’s performance will be in the positive trajectory given its strict cost rationalisation measures and the end of price ceiling contract. Valuation At current market price of Rs.169 the stock is trading at an EV/EBITDA multiple of 6.0x and 5.2x its FY12E EBITDA of Rs.9,872 cr and FY13E EBITDA of Rs.11,538 cr respectively. We value the stock at EV/EBITDA multiple of 7.3x its FY12E EBITDA of Rs.9,872 cr and 6.2x its FY13E EBITDA of Rs.11,538 cr and arrive at a target price of Rs.230. We recommend BUY for Hindalco for an investment horizon of 12 months; and the recent underperformance over the past month provides an upside potential of 37%. Sector: Metal & Mining Key Details Market cap(Rs. cr) 32,162 Market cap(US$ mn) 7163.0 O/S share, cr 191.4 Face value, Rs. 1 2 Week avg vol, NSE lakh 55.6 52 Week high 251.9 52 Week low 140.3 Rs/US$ 44.90 Bloomberg HNDL IN Reuters HALC.BO NSE HINDALCO BSE 500440 Share holding, % Q4 FY11 Q4 FY10 Promoters 32.06% 32.08% FII 30.91% 28.94% Inst Inv 12.97% 15.66% Others 24.06% 23.32% Source: BSE Subrata Das (Analyst) [email protected] Siddharth Rajpurohit (Senior Analyst) [email protected] 110 130 150 170 190 210 230 250 270 Hindalco Sensex CMP Rs.168 Recommendation: BUY Target Price Rs.230

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Page 1: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

1 | P a g e

Initiating Coverage

Steady prices backed by robust demand and supply shortfall Copper price is expected to remain steady backed by huge demand from the consumer industry and supply concern. Demand from China is expected to remain strong, but may witness some softening due to the hike in interest rates impacting the growth in industrial activities. The reconstruction activities post tsunami in Japan will also increase demand for copper. With major copper miners cutting down their output in the recent times, copper supply is likely to remain tight.

New capacity addition to restrict the rise in aluminium prices Aluminium price rose to $2644/ton in June 2011 after hitting a low of $1930 in June last year. Aluminium price has been on traction with demand outpacing supply in spite of large stockpile lying in LME inventory. The strong aluminium price can be attributed to the number of finance deals which have tied up a huge aluminium stocks keeping it away from the physical market. However, new capacity addition in Middle East and China will keep a check on the aluminium price. We expect LME aluminium price to remain in the range of $2500-2550 in FY12 and FY13.

Capacity expansion will drive growth in top line from FY13 Hindalco has laid down a massive expansion plan to treble its capacity by FY16. However, the construction activity has been hindered by several reasons delaying the commissioning of new capacities. The company expects Mahan smelter (capacity 359 KTPA (Thousand Tonnes Per Annum)) to commission in Q3 FY12 and the refining plant in Utkal (capacity 1500 KTPA) to start production by Q2 FY13. The new capacity coming on stream will drive FY13 top line and the full impact of the new capacity will be visible from FY14 onwards.

Novelis turnaround Novelis has reported improved performance since Hindalco has acquired it and in FY11 it has reached the much coveted target of adjusted EBITDA of $1 billion. Hindalco has levered the balance sheet of its Canadian subsidiary in FY11 which has been instrumental for the payment of $1.7 billion by Novelis as a return of capital to Hindalco. We believe that going forward Novelis’s performance will be in the positive trajectory given its strict cost rationalisation measures and the end of price ceiling contract. Valuation At current market price of Rs.169 the stock is trading at an EV/EBITDA multiple of 6.0x and 5.2x its FY12E EBITDA of Rs.9,872 cr and FY13E EBITDA of Rs.11,538 cr respectively. We value the stock at EV/EBITDA multiple of 7.3x its FY12E EBITDA of Rs.9,872 cr and 6.2x its FY13E EBITDA of Rs.11,538 cr and arrive at a target price of Rs.230. We recommend BUY for Hindalco for an investment horizon of 12 months; and the recent underperformance over the past month provides an upside potential of 37%.

Sector: Metal & Mining

Key Details Market cap(Rs. cr) 32,162 Market cap(US$ mn) 7163.0 O/S share, cr 191.4 Face value, Rs. 1 2 Week avg vol, NSE lakh 55.6 52 Week high 251.9 52 Week low 140.3 Rs/US$ 44.90 Bloomberg HNDL IN Reuters HALC.BO NSE HINDALCO BSE 500440

Share holding, % Q4 FY11 Q4 FY10 Promoters 32.06% 32.08% FII 30.91% 28.94% Inst Inv 12.97% 15.66% Others 24.06% 23.32%

Source: BSE

Subrata Das (Analyst) [email protected] Siddharth Rajpurohit (Senior Analyst) [email protected]

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CMP Rs.168 Recommendation: BUY Target Price Rs.230

Page 2: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

2 | P a g e

Company background- Hindalco

Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity is one of the largest aluminium and copper producers in India. Its aluminium production process encompasses the entire gamut of operations, from bauxite mining, alumina refining, aluminium smelting to downstream rolling, extrusions and recycling. It has 500 KTPA of upstream aluminium and 1500 KTPA alumina capacity. The company has an integrated complex at Renukoot, Uttar Pradesh with an alumina refinery, an aluminium smelter and facilities for production of downstream products. It has another smelter located in Hirakud, Orissa and two more refineries are located in Belgaum, Karnataka and Muri, Jharkhand.

Hindalco operates the world’s largest single location copper smelter with a capacity of 500 KTPA at Dahej. It has captive power plant (1109 MW), jetty, and backward linkage for 25% copper concentrate through long term contract with Aditya Birla Mineral (a 51% subsidiary). The Copper unit produces copper cathodes, continuous cast copper rods along with other by-products, including gold, silver and DAP fertilizers.

Hindalco acquired Novelis in 2007, a company many fold its size for an enterprise value of $6.1 billion. With Novelis under its fold, Hindalco is now the world’s largest aluminium rolling company, being an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities.

Exhibit 1: Production process flow for copper Exhibit 2: Production process flow for aluminium

Source: Company, SIHL Research

Source: Company, SIHL Research

Page 3: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

3 | P a g e

Capacity expansion till FY16: HIL is in the midst of massive capacity expansion which includes aluminium smelting capacity of 1,600 KTPA, up from 500 KTPA and alumina refining capacity of 4,500 KTPA from 1,500 KTPA by FY16.

(1) Utkal alumina: The Utkal alumina project at Rayagada, Orissa is a Greenfield 1.5 MTPA (Million Tonnes Per Annum) alumina refinery project. The project cost is Rs.7,009 cr( debt equity ratio 70:30) without financing cost. The project is expected to complete in Q1 FY13. The refinery has a captive bauxite mine in Baphlimali, 20 km away from the site.

(2) Mahan aluminum: Under the Mahan aluminum project the company is setting up a 359 KTPA aluminum smelter and a 900 MW captive thermal power plant. The project cost is Rs.10,500 cr ( debt equity ratio 75:25) without financing cost. The project is expected to be commissioned in Q3 FY12. It has access to the Mahan coal block (off the main basin in the Singrauli coal field) through a joint venture with Essar Power. Hindalco's share in the coal block is about 3.6 MTPA.

(3) Aditya aluminum: The project comprises of an aluminum smelting plant with capacity of 359 KTPA and a 900 MW captive power plant at Lapanga, Orissa. The project also has a 20 MTPA joint venture coal mine at Lb Valley, coal blocks Talabira II and III, Orissa. The total cost for the project is 9,200 crore except the financing charges. The project is expected to be commissioned by the end of FY13 and has received the necessary approvals. The second phase of the project which comprises of a 1.5 MTPA alumina refinery at Kansariguda, Orissa is slated to be commissioned by the end of FY14. The refinery project has a captive bauxite mine with a reserve of 4.2 MTPA.

(4) Jharkhand aluminum: The project has 359 KTPA smelting plant and a 900 MW captive power plant. The project cost is estimated at Rs.10,000 cr without financing cost. It has a 6 MTPA coal mine in the Auranga coal fields at Jharkhand in joint venture with Tata Power. The project is expected to commission in mid 2015.

(5) Hirakud brownfield expansion: The expansion of the smelter capacity in Hirakud from 155 KTPA to 213 KTPA is being carried out in two stages. The first phase, which includes expansion of capacity from 155 KTPA to 161 KTPA, was completed in Q4 FY11. The second phase of expansion from 161 KTPA to 213 KTPA, along with a captive power plant of 100 MW, is expected to be completed in early FY13.

Exhibit 3: Project details

Particulars Utkal alumina

Mahan aluminium

Aditya aluminium

Jharkhand aluminium

Hirakud aluminium

Nature Refinery Smelter Refinery and Smelter Smelter Smelter

Capacity 1,500 KTPA 359 KTPA, 900 MW Power plant

Refinery 1,500 KTPA, Smelter 359 KTPA, 900 MW Power plant

359 KTPA, 900 MW Power plant

Expansion of 52 KTPA and 900 MW power plant

Project Cost Rs.7,009 cr Rs.10,500 cr Rs.9,200 cr* Rs.10,000 cr NA Location Orissa Madhya Pradesh Orissa Jharkhand Orissa

Source: Company, SIHL Research *Project Cost only for the smelter

Page 4: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

4 | P a g e

Company background- Novelis

Novelis was created as a spinoff of Alcan‘s rolled products business in 2005. Hindalco in May 2007 acquired Novelis through its wholly-owned step down subsidiary AV Metals Inc., pursuant to a plan of arrangement at a price of $44.93 per share. The aggregate purchase price comprised of an equity portion of $3.4 billion and $2.8 billion for Novelis‘ debt taking the total Enterprise Value to ~$6.2 billion plus. In September 2010, the holding company of Novelis was amalgamated with AV Aluminium to form Novelis Inc.

Novelis is the world’s leading aluminium rolled products producer based on shipment volume. Novelis produces aluminium sheet and light gauge products for the beverage and food can, transportation (radiators and air conditioners in trucks and cars), electronics (electronics and communication equipments and consumer durables), construction and industrial, and foil products markets. It sources primary aluminium such as aluminium ingot and molten metal or recycles used beverage cans and other recyclable aluminium to use as raw material for the production. Recycled aluminium has become an important and growing source of raw material for Novelis and it is in a process to increase larger amount of recycled aluminium in its production process. Beverage can sheet is the single largest revenue source for the company. It sells directly to beverage makers and bottlers as well as to can fabricators that sell the cans they produce to bottlers.

Capacity expansion till FY16: Novelis has a huge capacity expansion plan spanning across three continents where it operates. The company will take the route of both brown field expansion and debottlenecking for the capacity augmentation which will run till FY16.

(1) South America. Novelis has a plan to invest $300 million towards expanding its rolling capacity in Pindamonhangaba, Brazil, thus increasing the plant’s capacity by ~220 KTPA. The project is expected to come on stream by the end of FY13. Moreover, the company plans to increase its base capacity by 30 KTPA through de-bottlenecking.

(2) Asia. The company plans to invest ~$400 million to expand its aluminium rolling and recycling operations in South Korea in order to cater to the growing demand in Asia and the Middle East. The rolling expansion, which will include investments in both hot rolling and cold rolling operations, will increase its aluminum sheet capacity in Asia by 350 KTPA. Additionally, ~70 KTPA of capacity will be increased through de-bottlenecking. The project is expected to come on stream by the end of FY13.

(3) Europe. In Europe, Novelis will focus primarily on de-bottlenecking initiatives. The company’s total capacity in Europe is expected to increase by ~ 90 KT to 990 KTPA.

(4) North America. In North America, Novelis plans to invest $200 million to increase its capacity by ~200 KTPA. Additionally; ~60 KTPA will be released through de bottlenecking. The project is expected to commission by FY16.

Exhibit 4: Capacity expansion by FY16

In KTPA Existing capacity Capacity addition Debottlenecking Total capacity North America 1,100 200 60 ~1,360 Europe 900 - 90 ~990 Asia 600 350 70 ~1,000 South America 400 220 30 ~650

Source: Company, SIHL Research

Page 5: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

5 | P a g e

Investment Rationale

Steady prices backed by robust demand and supply shortfall Copper price has rallied in FY11 surging 33% over the last year. Even though the copper prices currently are down by 8% from March 2011 due to natural disaster in Japan and political unrest in Middle East, we expect the softening in price is temporary in nature and the demand supply mismatch in the copper market will keep the copper prices on the higher side. As per the International Copper Study Group (ICSG) forecast the global copper production deficit is expected to reach at 3,77,000 Tonne in CY11 and 2,79,000 Tonne in CY12 respectively.

Exhibit 5: Global copper production / demand deficit

Source: ICSG, SIHL Research

China which accounted for 38% of the world copper consumption in 2011 will lead the global copper demand in the coming days despite the concern of higher interest rate. The shrinking stockpiles in Shanghai Future Exchange (SHFE) (72,000 Tonne at the end of May 2011 from 1,05,000 Tonne at the end of March 2011) and better than expected May 2011 Chinese industrial production data are the indications of a turnaround in the Chinese demand. ICSG reported that restocking of inventory and growth in semi fabricated product will drive the demand for copper in China. Copper demand from Japan will also remain strong with the commencement of reconstruction activities post tsunami.

We expect that the current shortfall in supply due to major copper miners reporting cut down in their production, will upheld the copper prices. Big players such as Freeport- McMoRan, BHP and Rio has announced decline in output from some of their largest mines across the world due to declining grade of copper in the current year. In the first three months of 2011 production from the 11 biggest listed miners declined by 8% compared to the same period last year. Anglo American, one of the miners in the list reported 14% decline in the copper production from the year ago period. Besides, lower production from the existing fields, the pace of mining capacity addition has also been slow till now to meet with the growth in demand. Two major capacity addition in this year- a production restart at Group Mexico’s Cananea mine in Mexico and an expansion of Antofagasta’s mine in Chile is likely to fall short to change the overall deficit scenario.

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Page 6: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

6 | P a g e

We expect copper Tc Rc* that rose by 20% in 2011 compared to that of last year may not witness the high

growth this year as the global copper demand will continue to outpace the concentrate supply. We have assumed 10% growth in Tc Rc in FY12 and FY13 respectively from the previous year’s level.

* TC/RCs (Treatment and Refining Charges) are paid by miners to smelters to turn copper concentrate into copper cathode. They are the key source of revenue for smelters, and tend to fall when concentrate availability is scarce and smelters are forced to offer competitive fees to attract limited business. Conversely, TC/RCs tend to rise when copper concentrate supply exceeds available smelting capacity.

Treatment fees are expressed in dollars per ton of concentrate received and refining fees in cents per pound of copper in the ore. The fees are deducted from the price paid by smelters to mining companies for the raw material.

New capacity addition to restrict the rise in aluminium prices Aluminium price rose to average of $2,644 /Tonne in June 2011 from the lows of $1,930/Tonne in June 2010. The price has gained momentum at a time when stocks in LME have been on a historic high level. At the end of May 2011 4.69 MT of aluminium is lying in LME- most of which are tied up in various finance deals. A low interest rate and warehouse charges have made the finance deals lucrative, attracting bankers and other financial institutes to invest in aluminium. This has kept aluminium away from the physical market. However the rise in interest rates may lead to closure of financial deals, restricting the rise in aluminium prices.

Higher aluminium prices have encouraged producers to ramp up their production as the primary aluminium output rose to a daily average of 1,18,000 Tonne per day in April 2011 from 1,15,400 Tonne per day in March 2011, according to data, compiled by the International Aluminium Institute. Production is likely to increase further with new capacities coming up in Middle East and China. Addition of new capacity (Exhibit 15) will keep the aluminium price on check.

Exhibit 6: LME aluminium inventory and price

Source: Bloomberg, SIHL Research

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Page 7: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

7 | P a g e

Capacity expansion will drive growth in top line from FY13 Hindalco has laid down a massive expansion plan to treble its capacity by FY16 (Exhibit 3). However, the construction activity has been hindered by several reasons delaying the commissioning of new capacities. At present no additional capacities are likely to come on stream by FY12 but a partial capacity addition is expected in FY13. The production from the Mahan Smelter and Utkal refinery will drive the revenue growth of FY13 and the same has factored in our model.

The 1,500 KTPA Utkal refinery for which financial closure has been achieved in 2010 is expected to come on stream in Q1 FY13. We have assumed 750 KT of alumina production from the refinery in FY13. Production from the Mahan smelter has been targeted at near to 195 KT in FY13E. The financial closure of the Rs.10,500 cr Mahan project has been achieved in March 2011.The project has access to a captive coal mine through a joint venture with Essar Power. However, mining from the block is subject to the government approval as the coal mine was categorized under the ‘no go’ area by the Environmental ministry. The company has applied for a tapering linkage to the ministry of coal for temporary supply of coal till the issue of captive mining is resolved. We have also considered the Brownfield expansion of Hirakud smelter (213 KTPA from the existing 155 KTPA) to come on stream by Q3 FY13 and factored it in our valuation.

Hindalco’s Aditya smelter and Novelis’ capacity expansions in Asia and South America are expected to come on stream by the end of FY13. However, we believe the new capacities on stream will start contributing to the revenue from FY14. Exhibit 7: Project update

Project Progress Expected Completion

Utkal Alumina Project finance completed Q1 FY13 Mahan Aluminium Project finance completed End 2011

90% of the project cost committed

Clearance for coal block awaited & applied for tapering linkage of coal Hirakud

Expansion 213 KTPA from 155 KTPA 2012 Source: Company, SIHL Research

Page 8: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

8 | P a g e

Novelis turnaround Novelis was in a poor shape in 2007 with a weak financial and hit by its own strategy. When Hindalco took over Novelis it had an adjusted EBITDA of only $349 million (FY07). Hindalco’s aim of turning Novelis into a $1 billion EBITDA company has been successful as the company has reported an adjusted EBITDA of $1.07 billion in FY11. We have noticed certain factors that have been instrumentals for Novelis turnaround and believe that they will play major role in its improvement in performance in the coming days also. Exhibit 8: Adj. EBITDA & FRP Shipment

Source: Company, SIHL Research

(1) Ability to pass cost inflation. The end of price ceiling contract on 1stJanuary2010 has enabled Novelis to pass on the rise in raw material price to the clients, helping the company to maintain stable earnings. The new contracts would be multi-year volume supply arrangements, but the quantity and pricing would be negotiated at intervals.

(2) Cost reduction. We have notice three important steps taken by Novelis for cost reduction.

(a) Reducing cost through recycling. Use of scrap and used beverage cans have helped Novelis to cut down its cost in the past and it is in a process to increase the use of recycled aluminium to achieve further cost rationalisation. It is the world leader in aluminium can recycling with 8 recycling plants across four continents. According to the Aluminium association, recycling aluminium cans would result in saving 95% of the energy required otherwise, and it reduces the overall cost of production by 4-5%. In FY11 and FY10 each the company recycled 1,000 KT of aluminium which was used in 33% of its total rolled product production.

(b) Reducing cost through plant relocation. Hindalco, the parent company decided on shifting the rolling assets of Rogerstone from UK to Hirakud in India, next to its smelter in Orissa. The plant will be operational by late 2012. We expect the Hirakud rolling plant to reduce the cost per ton of rolled sheets due to the integrated nature of the mill with accompanying aluminium smelters.

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Page 9: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

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(c) Plant shutdown. Novelis implemented numerous cost saving initiatives through shutdown of high cost units, staff rationalisation etc. Novelis has sold its plant at Bridgnorth, UK (which produced foils a low margin business) with the aim of focusing on high margin products. One of its Brazilian smelter has been shut down in 2010 which was running at loss especially due to higher energy cost.

Financial restructuring. Novelis raised $4 billion of debt in 2010 comprising of $2.5 billion of senior notes and $1.5 billion of secured term loan facility. The debt has been used to refinance its $2.3 billion previous debt and to make a payment of $1.7 billion to Hindalco as a return of capital. Hindalco has repaid $1 billion term loan that it had raised to buy Novelis and the balance amount will be used for capital expansion. The main objectives of Novelis refinancing were

(1) The money from Novelis will be used by the parent company to fund its huge expansion plan. Post the repayment of $1 billion term loan the company can now use its underleveraged balance sheet to fund its capex.

(2) Novelis’s cash was not accessible to Hindalco before the financial restructuring due to the restrictive loan covenant. The refinancing allowed cash fungibility between two companies after a successful renegotiation with the bond holders and bankers of Novelis at a net debt to EBITDA covenant of three times. This has opened up the avenue for Hindalco for receiving more aids from Novelis in the future whenever required.

Exhibit 9: Novelis restructuring

Source: Company, SIHL Research

Page 10: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

10 | P a g e

Valuation Exhibit 10: One year forward EV/EBITDA multiple band

Source: Company, SIHL Research At current market price of Rs.169 the stock is trading at an EV/EBITDA multiple of 6.0x and 5.2x its FY12E EBITDA of Rs.9,872 cr and FY13E EBITDA of Rs.11,538 cr respectively. We value the stock at EV/EBITDA multiple of 7.3x its FY12E EBITDA of Rs.9,872 cr and 6.2x its FY13E EBITDA of Rs.11,538 cr and arrive at a target price of Rs.230. We recommend BUY for Hindalco for an investment horizon of 12 months; and the recent underperformance over the past month provides an upside potential of 37%.

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Page 11: Hindalco Industries - Myirisbreport.myiris.com/SIHL/HININDUS_20110621.pdfCompany background- Hindalco . Hindalco Industries Limited (HIL), a Fortune 500 and Aditya Birla Group entity

Hindalco Industries 21st June 2011

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Financials

Exhibit 11: Profit & Loss statement Particulars, Rs. cr FY10 FY11 FY12E FY13E Net Sales 60,708 72,078 78,117 87,959 Total Operating Expenditure 50,962 64,076 68,245 76,421 EBITDA 9,746 8,002 9,872 11,538 Depreciation 2,784 2,750 2,934 3,339 EBIT 6,962 5,252 6,939 8,199 Other Income 323 431 494 494 Interest 1,104 1,839 1,926 2,236 PBT 6,181 3,843 5,506 6,456 Tax 1,829 964 1,542 1,808 PAT 4,352 2,879 3,964 4,648

Source: Company, SIHL Research Exhibit 12: Balance sheet Particulars, Rs. cr FY10 FY11 FY12E FY13E Sources of Funds

Share Capital 198 199 199 199 Reserves & Surplus 21,346 28,824 32,231 36,363 Shareholders' Funds 21,545 29,023 32,430 36,562 Loans & Funds 23,999 27,692 36,179 41,998 Minority Interest 1,737 2,217 2,217 2,217 Deferred Tax Liability 3,938 3,760 3,760 3,760 Total 51,219 62,692 74,586 84,536 Application of Funds

Fixed Assets 34,801 45,536 54,827 63,713 Investments 11,246 10,855 10,855 10,855 Inventories 11,275 14,096 15,352 17,084 Sundry Debtors 6,544 8,000 8,680 9,773 Cash and Bank Balances 2,195 2,556 2,876 2,744 Other Current Assets 57 135 135 135 Loans And Advances 3,117 3,199 3,480 3,919 Current Asset, Loans and Advances 23,188 27,985 30,523 33,654 Current Liabilities 13,100 16,469 16,405 18,471 Provisions 4,917 5,215 5,215 5,215 Current Liabilities, Provisions 18,017 21,684 21,620 23,686 Net Current Assets 5,172 6,301 8,904 9,968 Miscellaneous Expenditure 0 0 0 0 Total 51,219 62,692 74,586 84,536

Source: Company, SIHL Research

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Exhibit 13: Cash flow statement

Particulars, Rs. cr FY10 FY11 FY12E FY13E Net Profit+ Depreciation 6606 5206 6674 7805 (Inc)/Decrease in Working Capital -598 -1066 -2283 -1197 Cash Flow from Operation 6008 4140 4391 6608 Capital Expenditure 4170 7456 12225 12225 Change in Investment Dec/(Inc) 815 -391 0 0 Cash Flow from Investment 4985 7065 12225 12225 Issue of Equity 23 1 0 0 Issue/(Repay) of Debt -321 3693 8487 5818 Dividend 327 334 334 334 Cash Flow from Financing -625 3360 8154 5485 Cash Flow from Year 398 435 320 -132 Opening Balance 2192 2195 2556 2876 Net Cash 2590 2630 2876 2744

Source: Company, SIHL Research Exhibit 14: Ratio analysis

Particulars, Rs. cr FY10 FY11 FY12E FY13E Growth

Sales Growth -8.0% 18.7% 8.4% 12.6% EBITDA Growth 228.2% -17.9% 23.4% 16.9% EBIT Growth - -24.6% 32.1% 18.2% PAT Growth - -33.8% 37.7% 17.3% Margin EBITDA Margin 16.1% 11.1% 12.6% 13.1% EBIT Margin 11.5% 7.3% 8.9% 9.3% PAT Margin* 7.2% 4.0% 5.1% 5.3% RoE 20.2% 9.9% 11.5% 12.2% RoCE 15.3% 9.3% 10.1% 10.4% Valuation EPS* 22.7 15.0 20.7 24.3 Book Value per Share 111.5 150.6 168.4 189.9 P/E 7.6 11.5 8.4 7.1 P/BV 1.6 1.1 1.0 0.9 EV/EBITDA 5.1 6.6 6.2 5.8 Fundamental Debt Equity 1.1 1.0 1.1 1.1 Interest Coverage Ratio 8.8 4.4 5.1 5.2

Source: Company, SIHL Research *Before Minority interest and Share of associates

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Exhibit 15: Global aluminium capacity addition (in KTPA)

Year Africa North America

South America Asia West

Europe East/Central

Europe Oceania Gulf Region Total

2002 1,543 6,999 2,312 2,391 3,993 3,860 2,115 - 23,213

2003 1,595 6,986 2,325 2,623 4,185 3,912 2,193 - 23,819

2004 2,039 6,727 2,373 2,802 4,352 4,100 2,256 - 24,649

2005 2,091 6,795 2,412 3,492 4,356 4,163 2,269 - 25,578

2006 2,116 6,629 2,541 3,603 4,429 4,220 2,278 - 25,816

2007 2,114 6,584 2,708 3,713 4,567 4,449 2,308 - 26,443

2008 1,934 6,606 2,748 4,221 4,829 4,693 2,351 - 27,382

2009 1,854 6,205 2,658 4,514 4,272 4,077 2,282 - 25,862

2010 1,989 5,843 2,434 2,719 4,309 4,128 2,342 3,041 26,805

2011E 2,008 5,845 2,419 2,758 4,339 4,114 2,371 3,626 27,480

2012E 1,999 5,846 2,595 3,095 4,340 4,083 2,385 3,636 27,979

2013E 2,002 5,845 2,661 3,274 4,430 4,083 2,407 4,386 29,088 Source: International Aluminium Institute (IAI), SIHL Research

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