hindalco industries initiating coverage

7/27/2019 Hindalco Industries Initiating Coverage

1/24Emkay Global Financial Services Ltd 1

December 16, 2011

Reco

AccumulateCMP

Rs 126

Target Price

Rs 154

EPS change FY12E/13E (%) NA

Target Price change (%) NA

Nifty 4,652

Sensex 15,491

Price Performance

(%) 1M 3M 6M 12M

Absolute 2 (13) (26) (44)

Rel. to Nifty 10 (5) (15) (28)

Source: Bloomberg

Relative Price Chart

100

135

170

205

240

275

Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11

Rs

-40

-28

-16

-4

8

20%

Hindalco (LHS) Rel to Nifty (RHS)

Source: Bloomberg

Stock Details

Sector Metals & Mining

Bloomberg HNDL@IN

Equity Capital (Rs mn) 1915

Face Value(Rs) 1

No of shares o/s (mn) 1915

52 Week H/L 252/113

Market Cap (Rs bn/USD mn) 240/4,545

Daily Avg Volume (No of sh) 10449755

Daily Avg Turnover (US$mn) 25.7

Shareholding Pattern (%)

Sep-11 Jun-11 Mar-11

Promoters 32.1 32.1 32.1

FII/NRI 39.4 42.4 42.4

Institutions 14.1 12.8 13.0

Private Corp 6.3 4.9 4.9

Public 8.2 7.8 7.7

Source: Capitaline

Jagdish Agarwal

[email protected]+91 22 6612 1381

Goutam [email protected]+91 22 6612 1275

Prince Poddar

[email protected]

+91 22 6612 1238

Initiatin

g

Coverage

Hindalco Industries

Novelis holds the key

Novelis to remain the key growth driver with an EBITDA ofmore than US$1 bn, largely immune to LME. Successful debtrefinancing to address concerns on cons. balance sheet

First quartile unit cost of production of domestic aluminiumbusiness to ensure profitability even at tough times. Three-fold rise in aluminium capacities to aid volume growth

Higher share of value added products in aluminium segment(~50%) and strong by-product contribution in copper businesswould help mitigating commodity risk to a large extent

Stability in Novelis with capex driven growth and attractivevaluations should outplay short- term concerns; Initiatecoverage with target price of Rs 154; Accumulate

Novelis to continue surprise positively with stable EBITDA

Post its turnaround, Novelis has been surprising positively with its strong operational

performance. During H1FY12, its adjusted EBITDA stood at US$607 mn, in line with the

FY12E guidance of US$1.1-1-15 bn. Adj. EBITDA/ tonne touched a high of US$418

during Q2FY12. We believe Novelis would continue to deliver strong performance as it

is largely immune to the LME volatility, being cost efficient and having pricing power.

Low cost operations, an asset; enhanced capacity, future trigger

Hindalcos aluminium cost of production (~US$1,650/ tonne) remains in the first quartile

of the global cost curve due to captive power and alumina backed by own coal and

bauxite mines respectively. Efficient technology, part sourcing of concentrate from

captive mines and significant by-product contributions make its copper business cost

competitive. Hindalco plans a threefold increase in its aluminium and alumina capacities

to 1.64 mtpa and 4.5 mtpa respectively in a phased manner by FY16, through bothgreenfield and brownfield expansions. The cumulative capex for these projects is

pegged at ~Rs500 bn. Though, there have been some delays in all the projects due to

various externalities, we believe FY13 would see some comfort as far as the

commissioning of Mahan smelter and Utkal refineries is concerned.

Focus on value added products to help mitigate volatility

Value added products constitute about half of Hindalcos aluminium operations in India.

In alumina, the focus remains on special grade (contributed 60% of the total alumina

sales during Q1FY12). In copper segment too, the company has value added products

meeting international standards. We believe this will continue to help the company offset

volatility in LME to a large extent. Long term engagement at higher copper TcRc

(Treatment and Refining charges) during early FY12 serves as a safeguard against therecent global pressure on TcRc contracts.

Project execution concerns priced in; valuations comfortable

At CMP of Rs 126, the stock trades at 7.8x and 5.4x FY13 EPS and EV/EBITDA

respectively. We believe delay in domestic projects is already priced in. However,

Novelis is likely to continue delivering excellent performance. Factoring these along with

volatility in aluminium prices and copper TcRc, we have valued Hindalco on SOTP basis

and arrived at a fair value of Rs 154/ share, providing an upside of 22%. We initiate our

coverage on Hindalco with a ACCUMULATE recommendation.

Financial Snapshot Rs Mn

YE- Net EBITDA EPS EPS RoE EV/

Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV

FY10 607,221 97,458 16.0 39,276 22.2 590.7 18.2 7.3 4.0 1.3

FY11 720,779 80,017 11.1 24,564 12.8 -42.1 8.5 16.5 6.9 1.4

FY12E 779,536 83,325 10.7 29,470 15.4 19.9 9.3 8.7 5.8 0.8

FY13E 808,267 93,322 11.5 32,091 16.8 16.5 9.3 7.8 5.4 0.7


2/24

Hindalco Industries Initiating Coverage

Emkay Research 16 December 2011 2

Investment Rationale

Indias leading aluminium producer

Hindalco is a leading producer of aluminium in India with an existing capacity of 506 ktpa of

primary aluminium. Its aluminium operations are largely integrated with bauxite mining,

alumina refining, primary aluminium, value added products (rolled products, extrusions, foils

and specialty alumina) and power generation. The acquisition of Novelis has provided thecompany a presence in the global high technology rolled product market. Hindalco, along

with Novelis, is the largest aluminium producer in rolled products category in Europe and

South America, while it ranks second in North America and Asia. Through Novelis, Hindalco

is also the largest producer of rolled beverage cans and aluminium automotive sheets in the

world.

While primary aluminium sales are expected to grow (kt) residual alumina sales are thus expected to decline (kt)

138 151239 223 210 195

316170 180

149 184 177 191

191

38 43

36 39 35 3469 7275

92 94 853690

2528

22 17 18 18

18

0

100

200

300

400

500

600

700

2007 2008 2009 2010 2011 2012E 2013E

Ingots Rolled Extruded Redraw Rods Foils

300260 238 241

310 339

170

0

50

100

150200

250

300

350

400

2007 2008 2009 2010 2011 2012E 2013E

Alumina

Source: Company, Emkay Research Source: Company, Emkay Research

It is also a leading copper producer

Hindalcos copper operation comprises of producing copper through smelting, converting to

copper cathode and continuous copper rods. The copper smelting facilities with a combinedcapacity of 500 ktpa located at Dahej, is one of the largest single location smelting facilities

in the world. Hindalcos copper smelting is also equipped to produce gold, silver, phosphatic

fertilizers and sulphuric acids as by- products. The domestic copper operation is also

supported by assured supply of concentrates (~20% of the total requirement) from its two

Australian copper mines viz. Nifty and Mount Gordon.

Copper production volumes to remain flat (kt) Volumes at Nifty and Mount Gordon to increase (tonnes)

109 140 146 147 145 138 142

294

328 301 333 336 320 335

0

100

200

300

400

500

2007 2008 2009 2010 2011 2012E 2013E

CC Rods Copper Cathodes

56,45058,034 58,600

60,000

2,000

1,8001,627

643

54,000

58,000

62,000

2010 2011 2012E 2013E

Nifty Mount Gordon



3/24



Table: Hindalcos standalone capacities in India

(Capacity in tpa) Dahej Renukoot Muri Belgaum Hirakud Alupuram Belur Taloja Mauda Kalwa Kollur Silvassa Renusagar Total

Alumin ium Operat ion s

Alumina 700,000 450,000 350,000 1,500,000

Primary Aluminium 345,000 161,400 506,400

Conductor redraw rods 56,400 56,400

Extrusion 23,000 8,000 31,000

Rolling plant 80,000 45,000 50,000 30,000 205,000

Foils 6,000 4,000 30,000 40,000

Specialty products 138,000 138,000

Copper Operations

Copper smelter 500,000 500,000

CC Rods 142,000 142,000

Sulphuric acid 1,670,000 1,670,000

Phosphoric acid 180,000 180,000

DAP and complexes 400,000 400,000

Gold 15 15

Silver 150 150

Power Operations

Power (MW) 367 742 1,109

Source: Company, Emkay Research

Low cost of production due to strong backward integration

The average global cost of aluminium production has been on the rise with it touching

US$2,050/ tonne in mid- 2011. The 90th

percentile cost remains at US$2,450/ tonne,

indicating ~21% rise in less than one year period. This has been due to commodity price

inflation across all categories viz. energy, coal and alumina.

Global cost curve is on the rise (US$/tonne)

1,018

1,328

1,650

2,050

1,288

1,693

2,031

2,450

0

500

1000

1500

2000

2500

2001 2005 2010 Mid-2011

Average 90th Percentile

Source: Company, Emkay Research, Industry Reports

Hindalco has been one of the low cost producers of aluminium globally. The average cost of

aluminium production for Hindalco currently has been ~US$1,650/ tonne and remains in the

first quartile of the global cost curve. The key reason for lower costs has been its own

power generation through captive coal mine and alumina through own bauxite mine.

Hindalco was also allotted another coal mine under Mahan project along with Essar Power

which is under review by MoEF (Ministry of Environment and Forest). Together with Mahan,

Hindalcos total coal reserve stands at 233 mt. On the other hand, its bauxite reserves are

443 mt. Both of these would be sufficient to meet Hindalcos requirement at enhanced

capacity for the next 25 years. With full backward integration, Hindalcos Hirakud smelter

has the lowest cost of production in the aluminium segment. While Renukoot smelter hassupport from captive alumina, coal sourcing through linkages and e-auction from Coal India

slightly elevates the operational costs.


4/24



In case of copper business, concentrate requirements are largely sourced through long

term contracts and partially from own operational mines in Australia. The company has

invested largely in superior technology smelters at Dahej. Along with that, use of captive

power and operation of own all-season jetty with handling capacity of 4,500 ktpa near

Dahej, helps the company scale down operational costs significantly compared to its peers.

With backward and forward integrations, we expect Hindalcos Indian operations to continue

to have low costs and be favorably positioned in the global cost curve.

Three fold capacity expansion plan to trigger future growth

Hindalco has embarked on a massive capacity expansion drive, with plans to increase its

capacity 3x to 1.64 mtpa through three greenfield projects viz. Mahan, Aditya and

Jharkhand. All the three projects consist of similar capacities i.e. 359 ktpa smelter with 900

MW captive power. The Mahan project is coming up in Bargwan, MP while the Aditya

project would be in Orissa. From existing combined capacity of 1.5 mtpa, alumina refining

capacity is being raised to 4.5 mtpa with additional 1.5 mtpa each in Utkal and Aditya

projects. The cumulative total capex for these projects is pegged at ~Rs 500 bn.

Table: Expansion projects for Hindalco

Project Name Project Type ProductNew Capacity

(ktpa)Total Cost

(Rs bn)Debt

(Rs bn)Drawdown

(Rs bn)Expected

Completion

Hirakud Brownfield Aluminium 51.6 - - - Q4FY12

Mahan Greenfield Aluminium 359.0 105.0 77.8 60.0 Q4FY12

Utkal Greenfield Alumina 1,500.0 72.0 49.1 40.0 Q4FY13

Aditya Greenfield Aluminium 359.0 105.0 NA NA Q1FY14

Aditya Greenfield Alumina 1,500.0 60.0 NA NA CY2014

Jharkhand Greenfield Aluminium 359.0 105.0 NA NA CY2015


Threefold increase in primary aluminium capacity (ktpa) and also in Alumina (ktpa)

506

1,635

359

359

359

52

0

300

600

900

1,200

1,500

1,800

Present Hirakud Mahan Aditya Jharkhand Total

1,500

4,5001,500

1,500

0

1,500

3,000

4,500

Present Utkal Aditya Total


In case of brownfield projects, smelting capacity expansion in Hirakud has been

progressing well and the company has already increased its capacity to 161 ktpa in

Q4FY11. Further expansion to 213 ktpa along with a CPP of 100 MW is scheduled to be

commissioned during end FY12. Next phase of expansion to 360 ktpa with additional CPP

of 500 MW is under evaluation. The company is also in the process of transferring key

equipments from FRP plant of Novelis in Rogerstone, UK to Hirakud at an estimated cost of

~Rs 8 bn. This would enable the company cater to the local and regional exports demand of

superior engineering products, including can body stock. The company has also been

evaluating expansion of its Belgaum special aluminium plant capacity from 189 ktpa to 301

ktpa.


5/24



Power capacity expansion plan (MW)

1,019

3,819

249

429

100

900

900

90090

90

0

900

1,800

2,700

3,600

4,500

Present

HirakudAl

MahanAl

Utkal

Alumina

AdityaAl

Aditya

Alumina

Jharkhand

Al T

otal

Pow er Cap (MW) Cogen Cap (MW) Power Cap. Add (MW) Cogen Cap. Add (MW)


Though, there have been some delays in all the projects due to various externalities, we

believe FY13 would see some comfort in terms of commissioning of Mahan and Utkal

projects. We have assumed 90 kt of incremental production from Mahan in FY13. Further

delay however, would be a deterrent due to significant cost overrun and lower volume.

Mahan smelter ramp-up plan (No. of pots)

40

360

40

140

140

0

50

100

150

200

250

300

350

400

Dec '11 - Apr '12 Apr '12 - Jul '12 Sep '12 - Dec '12 Dec '12 - Jan '13 Jan '13

Starting with addition of 40 pots in December 2011, Hindalco plans to ramp-up its Mahan

smelter to 360 pots by January 2013.

High margin value added products to help mitigate LME volatility risk

Hindalco has been constantly focusing on the value added products in its aluminium

business. Value-added products in the form of rolled products, extrusions, redraw rods and

foils, on an average, constitute about half of Hindalcos aluminium sales volume.

High share of value-added products by volume in Al sales is expected to fall by 2013 on lack of capacity additions

Foils5%

Rolled Products55%

Redraw Rods29%

ExtrudedProducts

11%

Value addedProducts

61%

PrimaryAluminium

39%

Foils5%

Rolled Products57%

ExtrudedProducts

11%

Value addedProducts

53%

PrimaryAluminium

47%Redraw Rods

27%


Rolled products which contribute more than 50% of the total volume of value-addedproducts, attract a premium of ~US$700/tonne


6/24



Premiums on value-added products to remain stable

19752318 2350 2350

543 640808 689 737 700 700766 985

1093 1062 105010501046

169 166 120 178 137 135 135

2481

2395

2597

2238

2665 2625

18712257 22502275

0

5001000

1500

2000

2500

3000

2007 2008 2009 2010 2011 2012E 2013E

1000

1500

2000

2500

3000

Rolled Extruded Redraw Rods Foils LME (RHS)

The premiums Hindalco enjoys on various products are largely stable and does not

necessarily depend on aluminium LME, as most of its aluminium operations are into value-

added segment. The same is evident from the chart above, which indicates that even during

sharp volatility in LME, the company has been able to maintain premiums in different

product segments. While LME may have impact on the topline of the company, the

bottomline remains largely protected.

In alumina also, the focus remains on special grade, which contributed 60% to the total

alumina sales in Q1FY12.

Like-wise, specials constitute a significant portion of total alumina sales (kt)

19.0

49.844.1

47.1

22.0

36.0

34.2 43.8 35.0

37.0

0

20

40

60

80

100

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

Standard Specials


In copper segment, the company has been into value added products with internationally

acceptable standards. As a custom smelter, Hindalco earns low but steady margins in

terms of TcRc. By-product sales from copper business constitute 13% of the segmental

revenue from copper. Hindalcos copper by-product portfolio comprises of gold, silver,

phosphatic fertilizer and sulphuric acid.

By-products of copper constitute a relatively lower proportion of sales (by value)

Copper Cathode50%

CC Rods37%

DAP &Complexes

30%Others13%

Gold 56%

SulphuricAcid 10%

Silver

4%


Even with volatile LMEs, the

premiums on value-added

products to remain stable, largely

protecting margins


7/24



We believe, in aluminium, fair exposure to value added products will continue to help the

company offset LME volatility risk to a large extent, as these charge handsome premium

over the LME and cater to customized demand category. On the other hand, in custom

copper smelting business, LME prices are only a pass-through. TcRc and contribution from

by-product sales drive segmental margins. Spot TcRc has significantly corrected during

H1FY12. However, Hindalcos low cost operations and contributions from by-product sales

would enable the copper business to contribute even at low market TcRcs. Further,

Hindalco usually has long term contracts, serving large part of its business needs.

Novelis: the stepping stone to global leadership

Novelis, earlier a part of Alcan Incs rolling division, was spun off and incorporated as a

separate entity in January 2005. Through acquisition of Novelis in May 2007, Hindalco

became the worlds leading aluminium rolled product producer based on shipment of

volume. It is now the largest producer in Europe and South America and second largest

producer in North America and Asia. Novelis has a market share of ~20% in the global flat-

rolled aluminium product market, with global leadership in used beverage can recycling. It

recycles ~40 bn beverage cans per annum. Novelis operates in 11 countries in the

abovementioned 4 continents through 31 plants.

Beverage cans form a major chunk of Novelis end use product shipments (2010)

Others

14%Transportation

7%

Industrial

10%

Foil and

packaging

15%

Beverage Cans

54%


Novelis turned around, to deliver stable EBITDA performance

Hindalco had to go though a tough period, immediately post its acquisition of Novelis at

US$6.2 bn due to the adverse demand scenario after the financial crises and also due to

unfavorable legacy contracts with its customers. Under these contracts, Novelis was not

allowed to re-price its conversion premium and in some cases, not allowed to pass through

LME prices. This was the primary reason behind the huge pressure on margins and

resultant losses. However, those contracts have expired and on the back of a demand

recovery, Novelis, with its leadership position, now enjoys pricing power on most of its

products. Coupled with this, cost-saving measures have helped the entity see a strong

turnaround with higher shipments and stronger operational performances.

While Novelis shipments have remained flat during the past few quarters

793 789 772 796 825 808

659 651 691724 683

756 779 751 800 797 765767

0

200

400

600

800

1000

Q

1FY08

Q

2FY08

Q

3FY08

Q

4FY08

Q

1FY09

Q

2FY09

Q

3FY09

Q

4FY09

Q

1FY10

Q

2FY10

Q

3FY10

Q

4FY10

Q

1FY11

Q

2FY11

Q

3FY11

Q

4FY11

Q

1FY12

Q

2FY12

Novelis Shipments (kt)


Strong value added product

portfolio in aluminium segment

and stable contribution from

copper by- products to help

mitigate LME volatility to a large

extent

After expiry of legacy contracts,

Novelis continues to deliver

superior performance in terms of

steady volumes and stronger

EBITDA/ tonne


8/24



During H1FY12, the adjusted EBITDA stood at US$607 mn, in line with the FY12E

guidance of US$1.1-1.15 bn. EBITDA/ tonne touched a high of US$418 in Q2FY12. We

believe Novelis would continue to deliver good performance as it is largely immune to the

LME volatility and also, due to exposure to the value added segment. Novelis currently

contributes two- thirds of consolidated revenue.

the EBITDA and EBITDA/tonne have been improving

128

229152

189

260

88 112 57

124 200 199231

263 290 242280 306 301

95

418399363338

393353323307289

191177116

335

250208

307

170

050

100150200250300350400

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

-50

50

150

250

350

450

Adj. EBITDA (US$ mn) Adj. EBITDA/tonne (US$)


During the period between Q4FY11 and Q2FY12, while the total shipments have taken a

marginal dip, the EBITDA/ tonne for Novelis has shown an increasing trend. Instead of

looking at total shipments by Novelis, we believe one needs to consider profitability in

different geographies, as the EBITDA/ tonne contributions are different for different

geographies. Novelis has been focusing on specific geographies which enable it to get

better margins. This is also is getting reflected in the increasing EBITDA/tonne.

Debottlenecking in key areas with fresh capacity addition to aid volumegrowth

Novelis has been executing capacity expansion through debottlenecking across all of its

geographical locations with an estimated capex of ~US$80 mn. This is expected to help

capacity growth of 3-4% per annum till FY14. The company has a total capex of US$1.5 bn,

out of which it plans to use US$900 mn in the following projects and rest would be used as

maintenance capex. In South Korea, additional capacity of 350 ktpa would help the

company expand its capacity in the Asian region to 1 mtpa by CY13 mainly catering to can

body stock, automotive sheet and electronic segments. In North America, additional

capacity of ~200 ktpa is slated to come on-stream by mid-2013 taking its global automotive

sheet capacity to 400 ktpa. It also has a plan to further double its capacity in the region

within three years. Novelis also plans to expand its production of aluminium can sheet in

Pinda, Brazil by ~220 ktpa by the end of CY2012. Additional 190 ktpa recycling capacity

has also been under consideration and likely to be completed by late CY13. All these

initiatives together are expected to increase the overall capacity by 18% by FY14. We

believe this would help Novelis increase its shipments, catering to new markets.

Novelis plans to spend US$1.5 bn

over next three years to expand

its capacity in various

geographies

Novelis has been meeting

EBITDA guidance for past few

quarters and recently it had

revised its EBITDA guidance for

FY12 at US$1.1- 1.15 bn


9/24



Capacity expansion plan of Novelis

Through debottlenecking

Expenditure (US$ mn)Region Additional capacity (KTPA)

FY12 Total

North America 60

South America 30

Europe 90Asia 70

80 80

New capacity addit ion

Expenditure (US$ mn)Region Additional capacity (KTPA)

FY12 Total

North America 200 80 200

Pinda, Brazil, SA 220 180 300

Korea, Asia 350 85 400

Total 345 900

Debt refinancing helped deleveraging standalone balance sheet

Novelis recently replaced its existing US$2.5 bn debt with a debt of US$4 bn at a slightly

higher interest rate of ~8%. Novelis plans to repay this debt partially in 2017 (US$1.1 bn)

and the rest by 2020. From this, US$1.7 bn has gone to Hindalco and is reported as return

to common shareholders in its balance sheet. US$1 bn from this has gone towards

repaying Hindalcos acquisition loan. The rest US$700 mn has been paid as dividend to

Hindalco. Other than easing of pressure from the standalone balance sheet, the refinancing

(on conducive terms) also helped cash fungibility between Hindalco and Novelis and helped

avoid financial risk. With a sizable expansion plan in the domestic business, we believe this

would help the company maintain the desired liquidity.

Table: Hindalco and Novelis debt repayment schedule

Mar-11 Repayments in

Hindalco Rs bn FY12 FY13 FY14 FY15 FY16 Post FY16

Rupee-term loan 51.43 21.47 25.72 4.25

Short-term loan 21.29

Standalone Hindalco 72.72 0 0 21.47 25.72 4.25 0

FC Loan at AV Minerals

(Guaranteed by Hindalco) Prepaid

Recourse Hindalco 72.72 0 0 21.47 25.72 4.25 0

Mar-11 Repayments inNovelis

US$ bn FY12 FY13 FY14 FY15 FY16 Post FY16

ABL (Total Limit US$ 800 mn) 0.017

Senior Notes 2.576 0.076 2.500

Bank Loan 1.458 0.015 0.015 0.015 0.015 0.015 1.383

Others 0.052

Total 4.103 0.015 0.015 0.015 0.091 0.015 3.883

Source: Company


10/24



Financial Overview

Primary aluminium capacity expansion to drive growth

Hindalco has been in expansion mode -with capacity additions in primary aluminium as well

as in rolled products through greenfield and brownfield projects. The brownfield expansion

of Hirakud smelter has already begun and the capacity addition of 52 ktpa is set to be

completed by early FY13. Owing to delays, we believe the Mahan project will also start

contributing by mid FY13. These additions are expected to drive topline growth of 5%

CAGR for standalone business and ~6% CAGR for consolidated business for next two

years. For Novelis, with stable shipments and overall stable LME the CAGR for the topline

is likely to be ~4% during FY11- 13 in USD terms. However, in INR terms this remains ~6%.

Standalone sales to grow at 5.4% CAGR during FY11-13E(Rs. bn)

Novelis topline line to grow at ~4% CAGR during FY11-13E(US$ mn)

195

239 249265

182192183

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012E 2013E

5.4% CAGR (FY11-13E)

1124610177

8673

10577 1099111370

0

2000

4000

6000

8000

10000

12000

2008 2009 2010 2011 2012E 2013E

3.7% CAGR (FY11-13E)


Consolidated sales to grow at ~5.9% CAGR during FY11- 13E (Rs. bn)

193

600660

607

721 780 808

0

100

200

300

400

500

600700

800

900

2007 2008 2009 2010 2011 2012E 2013E

5.9% CAGR (FY11-13E)


Assumptions for FY12E and FY13E

Parameters FY12E FY13ESales volume (tonne)

Aluminium Total 522,754 650,960

Copper Total 320,000 335,000

Alumina 338,820 169,661

Novelis Shipments (kt) 3,042 3,115

Realization (Rs/ tonne)

Aluminium ingots 114,000 111,625

Copper cathode 386,400 382,375

Novelis (US$ / tonne) 3,605 3,650

LME (US$/ tonne)

Aluminium 2,275 2,250Copper 8,000 8,000

Exchange rate (USD/INR) 48.0 47.5


As per Bloomberg the median

forecast for Aluminium LME for

CY12 and CY13 remain US$2325

and US$2475 respectively

The same for copper stand at

US$8706 and US$8525

respectively for CY12 and CY13

Higher growth rate in consolidated

topline is primarily due to

depreciation in INR


11/24



Segmental contribution from aluminium and copper businesses

While the revenue contribution from copper business is high (67% in 2011), the EBIT

contribution being a custom smelter is very low (only about 23% in FY11), as it essentially

depends on the TcRc and by-product contributions. This drags down the overall margins for

the standalone business.

While Copper standalone revenue contribution is high its contribution to earnings is comparatively lower

73 71 76 70 80

110 121 106 125159

0

50

100

150

200

250

300

2007 2008 2009 2010 2011

Aluminium Copper

(Rs bn)

2924 22

18 20

5

54

76

0

5

10

15

20

25

30

35

40

2007 2008 2009 2010 2011

Aluminium Copper

(Rs bn)

EBITDA to grow gradually supported by Novelis; margins to remain stable

As Hindalco has been a custom copper smelter, contribution from copper business to the

margins has been lower as compared to aluminium business. This is why despite earning

EBIT margin of 25% in aluminium business, the overall standalone EBITDA margin remains

at ~13.5% range. Despite a negative CAGR of ~2% in EBITDA between FY08- FY11 for the

standalone business, the consolidated EBITDA grew at a CAGR of ~6.4%. Supported by

the increased production of aluminium, the standalone EBITDA is expected to grow at a

CAGR of 7%. On the other hand backed by a sharp CAGR of 12% in Novelis the

consolidated EBITDA should show a CAGR of 8% during FY11-13. The EBITDA growth

rate in Novelis could be higher in INR term.

Standalone EBITDA to grow steadily, margin to remain flat Novelis EBITDA to see improvement with better margins

2932 33

3640

3430

13.7%13.3%13.4%15.1%

16.7%17.7%

21.9%

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012E 2013E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

EBITDA (Rs bn) EBITDA Margin (%)

533 566

1085935 1020

11685%

6%

13%

9%

10%9%

0

200

400

600

800

1000

1200

1400

2008 2009 2010 2011 2012E 2013E

0%

2%

4%

6%

8%

10%

12%

14%

EBITDA (US$ mn) EBITDA Margin (%)


Consolidated EBITDA to grow modestly, margins likely to improve

44

66

30

97

80 8393

11.1%

22.9%

4.5%

16.0%

11.1% 10.7% 11.5%

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012E 2013E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

EBITDA (Rs bn) EBITDA Margin (%)



12/24



Consolidated PAT likely to grow at 14% CAGR

While the standalone EBITDA is likely to grow at 6%, the PAT would show a meager CAGR

of 3% during 2011-2013E primarily due to higher fixed costs (higher interest costs and

depreciation). This however, would be significantly more than compensated by the strong

PAT growth (of 73% CAGR) in Novelis. Thus, the performance is likely to be better at the

bottomline level on a consolidated basis. We expect the consolidated PAT to grow a CAGR

of 14% during FY11- 13.

Standalone PAT to remain flat through 2013 Novelis is likely to see strong bottomline growth

22

2926

23

19

21 22

14.0% 14.9%

12.2%

9.8%9.0% 8.9% 8.6%

0

5

10

15

20

25

30

35

2007 2008 2009 2010 2011 2012E 2013E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

PAT (Rs bn) PAT Margin (%)

116-1910-117

405 245 348

5% 1%2% 3%

-19%

-1%

-2500

-2000

-1500

-1000

-500

0

500

1000

2008 2009 2010 2011 2012E 2013E

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

PAT (US$ mn) PAT Margin (%)


Consolidated PAT to grow at a faster pace

2724

5

39

2529

32

4.0%3.8%

3.4%

6.5%

0.7%

13.9%

4.0%

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012E 2013E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

PAT (Rs bn) PAT Margin (%)


Return ratios to improve on a consolidated basis

Due to continuous expansion in domestic business, the return ratios for Hindalco

standalone business have remained low in the past few years and are expected to remain

so till FY13. On a consolidated basis however, RoE is likely to improve from the current

levels. Hindalcos standalone business is basically a margin driven business, whereas in

case of Novelis, the focus is on per tonne profitability, as it is essentially a converter of

primary aluminium into value-added products. Thus on a consolidated basis, lower returnratios might not be a true reflection of the companys operational efficiency.

Standalone returns to remain low but consolidated returns to improve gradually

20.7

16.4

16.6

10.4

7.16.4 6.5 5.8 5.6

9.4

6.9 7.2 7.0 6.8

0.0

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012E 2013E

RoCE RoE

21.0

13.915.7

7.4

-0.1

13.6

8.4 7.0 7.23.1

18.2

8.59.3 9.3

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012E 2013E

RoCE RoE



13/24



Valuation

Hindalco is a leading domestic aluminium producer with fully integrated operations across

the value chain and falls in the first quartile of the cost of production. Novelis has been

performing well and is largely immune to fluctuations in LME prices. Copper operations are

steady and the contributions from its by-products are significant. With an ambitious growth

pipeline entailing a threefold capacity expansion in the domestic operations, it would find a

place among the top aluminium producers in the world.

Hindalco has demonstrated a successful turnaround in Novelis through its cost cutting

measures with savings of US$140 mn during FY10 and also, due to expiry of unfavorable

contracts followed by impressive performance in subsequent quarters. Domestic business,

on the other hand, has come under pressure at the operational level during last couple of

years due to sharp cost escalation of raw materials, mainly coal. Thus, despite a negative

CAGR of 2% and 10% in EBITDA and PAT between FY08-FY11 for the standalone

business, the consolidated entity reported a CAGR of 6.6% and 1.4% for EBITDA and PAT

respectively. This is primarily due to the contribution of Novelis. We believe that while the

standalone EBITDA and PAT will grow at a CAGR of 6.6% and 3%, consolidated business

will witness an EBITDA and PAT growth of 8% and 14% respectively during FY11-13E

period.

Hindalco has been trading in a band of 2x-18x 1yr. fwd PE It has been trading between 2x-9x 1yr. forward EV/EBITDA

0

100

200

300

400

500

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

(InRs)

Price 18x 14x 10x 6x 2x

0

200000

400000

600000

800000

1000000

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

EV(Rsmn)

EV 9x 7x 5x 2x


The major long- term growth trigger for the company would be huge capacity expansion in

the Alumina and Aluminium businesses. However, the company has been facing few

concerns related to raw material security. Hindalco was also allotted a coal mine under

Mahan project along with Essar Power which is under review by MoEF (Ministry of

Environment and Forest).


14/24



At the CMP of Rs 126, the company discounts its FY12E and FY13E EPS by 8.7x and 7.8x

respectively. On EV/EBITDA basis, the company trades at 5.8x and 5.4x for FY12E and

FY13E respectively. While major global aluminium peers, on an average basis, are trading

at 14.5xFY13 EPS and 6.9xFY13 EV/EBITDA, major global copper peers are trading at an

average 7.6xFY13 EPS and 4.7xFY13 EV/EBITDA. Looking at Novelis pricing power and

its imperviousness to LME fluctuations to a large extent, we believe it deserves a better

multiple compared to most of its global peers.On a SOTP basis, we have valued Hindalcos

standalone business, ABML and Novelis at 5.5x and 5x and 6xFY13E EV/EBITDArespectively, which translates into a fair value of Rs 154 per share, providing an upside of

22%. We initiate our coverage on Hindalco with a ACCUMULATE recommendation.

FY13 EBITDA (Rs mn) Multiple EV (Rs mn)

Standalone business 36,221 5.5 199,213

Novelis 51,721 6 310,323

ABML (51%) 4,174 5 10,645

Total EV 520,181

Net debt 254,058

Market cap 266,123

Per share value 139

Value of investment (20% discount) 15

Fair value (Rs/ share) 154

Global peers Aluminium and Copper producers

PE P/BV EV/EBITDA ROECompany

Market cap(USD mn) CY12E CY13E CY12E CY13E CY12E CY13E CY12E CY13E

Aluminium

Alcoa Inc 9,621 11.10 9.48 0.68 0.63 6.12 5.71 6.11 6.70

Chalco 12,621 29.82 27.96 0.72 0.69 13.11 12.58 2.95 3.89

Norsk Hydro 9,242 12.76 12.38 0.65 0.63 4.30 5.20 9.82 5.45

BHP Billiton 177,588 8.44 7.97 2.65 2.11 4.45 4.20 35.14 29.55

Average 15.53 14.45 1.18 1.02 7.00 6.92 13.51 11.40

Copper

Freeport-Mcmoran 35,812 7.61 7.88 2.32 1.94 3.57 3.61 31.67 25.10

Jiangxi Copper 10,641 6.50 6.48 1.21 1.08 6.87 6.81 19.37 17.85

Xstrata Plc 43,845 7.21 6.40 0.95 0.84 4.53 4.13 13.85 14.70

Grupo Mexico 20,990 9.05 8.43 2.98 2.50 4.55 4.24 35.98 33.10

Aurubis Ag 2,316 7.70 8.84 1.02 0.95 4.42 4.50 14.73 10.77

Average 7.61 7.61 1.70 1.46 4.79 4.66 23.12 20.30

Source: Bloomberg, Emkay Research

Domestic peers Non-ferrous players

PE P/BV EV/ EBITDA ROECompany

Market cap(INR mn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Sterlite Ind. 334,053 5.73 5.06 0.70 0.62 4.33 3.72 13.14 13.54

HZL 517,813 9.18 8.17 1.88 1.57 5.83 5.15 21.98 20.51

NALCO 132,212 8.62 9.41 - - 3.86 4.20 - -

Ess Dee Al. 4,326 3.55 2.90 0.52 0.44 3.42 2.79 15.15 15.87

Average 6.77 6.39 1.03 0.88 4.36 3.97 16.76 16.64

Source: BSE, Bloomberg, Emkay Estimates; Bloomberg Consensus.


15/24



Risks and Concerns

Project delays

Many of the projects have been facing delays due to various factors mainly supply shortage

of coal.

Hindalco had announced its greenfield expansion plan in FY07-08 with initial capacities

were kept at 325 ktpa aluminium smelter and 725 MW power plant in each of the projects.Subsequently, these planned capacities were raised to 359 ktpa with 900 MW CPPs. Utkal

alumina refinery project, with 1.5 mtpa capacity, was initially scheduled to be completed by

March 2010, which pushed further to July 2011. Now schedule commissioning of Mahan

and Utkal projects are due late FY12 and FY13 respectively. The company has been

maintaining that both Utkal and Mahan projects are currently on track and would be

completed without further delay. Since Mahan coal project is still facing a lot of

uncertainties, we feel the company might have to procure coal from the open market

primarily through e-auction and import adversely impacting overall costs.

Volatile prices

While increase in aluminium and copper LME prices can bring about a significant

improvement, a sharp fall in these prices may adversely affect the company profitability aswell as topline. Since the beginning of FY12, copper and Aluminium LMEs have fallen by

19% and 22% to US$7,586/tonne and US$2021/tonne respectively. However, the YTD

averages for copper and aluminium stand at US$ 8,601/tonne and US$ 2,383/tonne against

FY11 averages of US$8,140/tonne and US$2,257 respectively. Among these two, Hindalco

has a greater dependency on aluminium LME. Thus, a continued downward movement in

aluminium LME may result in earnings downgrade for all aluminium businesses. On the

other side, being largely a custom smelter, a contraction in TcRc and any significant fall in

by-product realizations would weigh heavily on the margins.

Exchange rate

Aluminium and copper are denominated in USD and are widely traded across the world. An

adverse movement of USD/INR rates (which, in case of Hindalco would be appreciation ofINR against US Dollar) would reduce the realization of these metals in INR terms and would

hence impact profitability for the company.

While Hindalcos performance has

been stable, the delays in

upcoming projects have resulted

in cost overruns and margin

pressures


16/24



Industry Brief

Global economic recovery short-term challenges

Aluminium

During FY11, aluminium prices averaged at US$2,257/tonne and FY12 began on a strong

note with average price in Q1 at US$2,603/ tonne. Aluminium, being closely linked toeconomic growth, has certainly borne its fair share of the impact of global weakening

sentiment, pushing cash prices down to US$1,977/tonne as on November 30, 2011. At

these levels, the LME breached the marginal cost of production for ~60% of the smelters.

This, we believe will help aluminium prices to consolidate around US$1,9002,000 before

gradually moving upwards led primarily by better annual consumption growth estimated at

6.5% surpassing annual production growth of 5.7%. We assume the LME for FY12 and

FY13 to be US$2,275/tonne and US$2,250/tonne respectively.

Aluminium prices and LME warehouse stock

0500

1000150020002500

30003500

Aug-07

Nov-07

Feb-08

May-08

Aug-08

Nov-08

Feb-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

(In$/tonne)

0

1000000

2000000

3000000

4000000

5000000

6000000

(Intonne)

Al-LME Inventory (R.H.S) Al-LME (L.H.S)


The three month aluminium price is in contango with premium of just US$2/tonne against a

year to date average of ~US$20/tonne. The LME aluminium stocks are currently at an all -time high of 4.8m tonnes.

On the global front, China's aluminium smelters may keep yearly contracts for alumina

imports low next year due to rise in its domestic production increases and prices. Term

alumina to China for CY12 shipments is being indicated at about 15.5% to 16.0% of the

price of primary aluminium on the London Metal Exchange after India's state-run National

Aluminium Co Ltd sold 300,000 tonnes at about 16% during Sep 2011. Major Chinese

importers have paid 14.8-15.5% for 2011 shipments of Australian alumina on a free-on-

board basis versus 14.5-15% in 2010. China's 46 mn tonnes of yearly alumina capacity

would produce 95% of the alumina requirement this year due to expanded capacity.

While FY12 Aluminium prices

began with a strong note, they

have corrected sharply the year

so far


17/24



Geography wise production and consumption of Aluminium

CAGR

CY06 CY07 CY08 CY09 CY10 CY11E CY12E 2006-12E 2006-10 2010-12E

Aluminium Production (kt)

Africa 1,864 1,815 1,715 1,681 1,824 1,935 2,052 1.6% -0.5% 6.1%

North America 5,332 5,545 5,783 4,850 4,690 4,966 5,345 0.0% -3.2% 6.8%

Latin America 2,493 2,557 2,660 2,508 2,494 2,368 2,548 0.4% 0.0% 1.1%

Asia (ex. China) 3,296 3,504 3,700 4,321 5,089 5,929 6,379 11.6% 11.5% 12.0%

Western Europe 4,541 4,664 4,840 3,964 4,089 4,103 4,369 -0.6% -2.6% 3.4%

Australasia 2,274 2,314 2,296 2,211 2,277 2,228 2,273 0.0% 0.0% -0.1%

China 9,349 12,607 13,076 13,550 16,404 17,821 18,240 11.8% 15.1% 5.4%

CIS and Eastern Europe 4,735 5,001 5,269 4,745 4,798 5,028 5,309 1.9% 0.3% 5.2%

Total 33,884 38,007 39,339 37,830 41,665 44,378 46,515 5.4% 5.3% 5.7%

Aluminium Consumption

North America 7,653 7,526 6,913 5,043 5,547 5,769 5,890 -4.3% -7.7% 3.0%

Asia (ex. China) 6,960 7,100 7,140 6,675 7,200 7,495 7,735 1.8% 0.9% 3.6%

Western Europe 7,055 7,244 7,256 5,900 6,786 7,023 7,164 0.3% -1.0% 2.7%

China 8,480 11,497 12,934 14,100 16,814 18,681 20,549 15.9% 18.7% 10.6%

Others 4,098 4,187 4,288 4,163 4,330 4,602 4,790 2.6% 1.4% 5.2%

Total 34,246 37,554 38,531 35,881 40,677 43,570 46,128 5.1% 4.4% 6.5%

Implied surplus (deficit) -362 453 807 1,949 988 808 387

Source: Industry, Emkay Research

Copper prices and TcRc movement

During FY11, copper prices averaged at US$ 8,140/tonne with Q4FY11 witnessing high

prices at US$9,651/tonne. During FY12, copper prices have been steadily declining with Q1

price at US$9,152/tonne, Q2 price at US$8,992/tonne and currently at US$7,586/ tonne.

The production (mine as well as refined) and consumption growth figures for copper standat 3.9% and 4.3% respectively.

Copper prices and LME warehouse stock

0150030004500600075009000

1050012000

Sep-07

Jan-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Mar-10

Jul-10

Nov-10

Mar-11

Aug-11

Dec-11

(US$/tonne)

0

100000

200000

300000

400000

500000

600000

(tonne)

Copper-LME Inventory (R.H.S) Copper-LME (L.H.S)


Though TcRcs began on a strong note in FY12 with couple of Japanese smelter closures

after the March 2011 earthquake, a series of mine strikes that caused disruptions in the

concentrate market have tightened TcRcs off late. Also, on the supply side, it looks like yet

another disappointing year with mine output now likely to come in flat at best. African

production is also falling behind our expectations, as Zambian growth has stuttered and

slipped below government targets this year.


18/24



Geography wise production and consumption of copper

CAGR

CY06 CY07 CY08 CY09 CY10 CY11E CY12E 2006-12E 2006-10 2010-12E

Copper Mine production (kt)

Total 14,990 15,483 15,546 15,950 16,097 16,443 17,383 2.5% 1.8% 3.9%

Year-on-year % change 0.50% 3.30% 0.40% 2.60% 0.90% 2.10% 5.70%

Copper Refined production (kt)

Africa 563 627 680 770 922 1,020 1,200 13.4% 13.1% 14.1%

North America 2,155 2,175 2,210 2,060 2,080 2,110 2,135 -0.2% -0.9% 1.3%

Latin America 3,553 3,595 3,535 3,600 3,660 3,725 3,818 1.2% 0.7% 2.1%

Asia (ex. China) 4,200 4,330 4,340 4,030 4,100 4,160 4,210 0.0% -0.6% 1.3%

China 3,047 3,497 3,779 4,252 4,800 5,184 5,547 10.5% 12.0% 7.5%

Australasia 429 442 502 446 430 455 480 1.9% 0.1% 5.7%

Europe 3,605 3,620 3,710 3,560 3,610 3,660 3,760 0.7% 0.0% 2.1%

Total 17,552 18,286 18,756 18,718 19,602 20,314 21,150 3.2% 2.8% 3.9%

Copper Refined consumption (kt)

North America 2,863 2,805 2,720 2,610 2,690 2,750 2,778 -0.5% -1.5% 1.6%

Latin America 554 568 580 560 580 610 640 2.4% 1.2% 5.0%

Asia (ex. China) 4,680 4,900 4,860 4,500 4,950 5,198 5,405 2.4% 1.4% 4.5%

China 3,820 4,525 4,930 5,670 6,294 6,703 7,239 11.2% 13.3% 7.2%

Europe 5,208 5,155 5,050 4,545 4,795 4,891 4,964 -0.8% -2.0% 1.7%

Others 343 350 352 340 351 362 366 1.1% 0.6% 2.1%

Total 17,468 18,303 18,492 18,225 19,660 20,513 21,392 3.4% 3.0% 4.3%

Implied surplus (deficit) 84 -17 264 493 -58 -199 -242

Source: Industry, Emkay research

Top aluminium producing companies in the world (2010) Top copper producing companies in the world (2010)

4,0833,790

3,444

2,940

1,5051,242 1,170 957 864 862

0

1,000

2,000

3,000

4,000

5,000

Rusal

RioTinto

Alcoa

Al.China

Norsk

BHP

DubaiAl.

ChinaPo.

Al.Bah

Shandong

Aluminium Production 2010 (kt)

550550578587615753901

1,0131,132

1,864

0

500

1,000

1,500

2,000

Codelco

Aurubis

Freeport

Jiangxi

Xstrata

Nippon

Glencore

BHP

Sumitomo

Grupo

Mexico

Refined Copper Production 2010 (kt)

Source: Bloomberg, Emkay Research Source: Bloomberg, Emkay Research


19/24



Annexure I

Aluminium manufacturing process

Mining of Bauxite ore, ~2 tonnes of

bauxite to give 1 tonne of alumina

Bauxite ore is

r e f i n e d i n t o

alumina

2 tonnes of alumina

required to produce

1 tonne of aluminium

~15,000 units of power

required to produce

1 tonne of aluminium

Alumina is reduced to aluminium

by the process of electrolytic

reduction

Aluminium is mixed with various

alloys depending on product to be

made

Aluminium is shipped - cut, bent,

shaped into various products

Alumi nium items junked or

scrapped are melted down for

reuse


20/24



Annexure II

Company background

Hindalco embarked on its journey in 1958 and its first major project was setting up India's

first integrated aluminium facility at Renukoot in 1962. It was backed by a captive thermal

power plant at Renusagar in 1967. Hindalco steadily attained leadership position in the

Indian aluminium and copper industry, thereafter. This was achieved in part by expansionthrough mergers and acquisitions with companies such as Indal and Birla Copper. Hindalco

also secured copper reserves and amplified its operating base by acquiring the Australian

Nifty and Mt. Gordon copper mines.

Over the years, Hindalco has grown into one of the largest vertically integrated aluminium

producers in Asia. Its copper smelter is today, one of the world's largest custom smelter at a

single location.

In 2007, the landmark acquisition of Novelis Inc., the world's largest aluminium rolling

company, placed Hindalco's footprint across the globe, securing it a rank amongst the top

five global aluminium majors and also placing it in the Fortune 500 league.

Novelis Inc.

Novelis Inc. is one of the world's leading aluminium rolled products producer. The company

produces high-quality aluminium sheet and foil products for customers in high -value

markets including automotive, transportation, packaging, construction and printing. It is the

top producer in Europe and South America, and the second largest in North America and

Asia. In its 2011 fiscal year, the company shipped 3.1 mt of aluminium products and

reported net sales of approximately USD 10.6 bn.

Novelis operations

Novelis

North

America

(FY11Shipments -

1,121 kt)

Asia

(FY11shipments -

581 kt)

South

America

(FY11shipments -

419 kt)

100%Holding - 11FRP Plants

Europe

(FY11shipments -

976 kt)

40% Affiliate -Logan,

Kentucky

100%Holding - 13FRP Plants

50% JV -Norf,

Germany

59%Subsidiary -Bukit Raja,Malaysia

68%Subsidiary,

Ulsan, Korea

68%Subsidiary,Yeongju,

Korea

100%Holding - 2FRP Units


Aditya Birla Minerals Ltd.

Aditya Birla Minerals Ltd. is the largest pure copper company listed on the Australian Stock

Exchange. Hindalco Industries Ltd. owns 51% of Aditya Birla Minerals Ltd. (ABML), a

company having 100% holding in Birla Nifty Pty Ltd. and Birla Mt. Gordon Pty Ltd. located in

Western Australia and Queensland, respectively. ABML, an S&P ASX 300 Index company,

is the largest pure copper company listed on the Australian Stock Exchange.

Mines in Australia - Net Profit at AUD 57 mn against AUD 61 mn in FY10


21/24



Copper mines in Australia - Nifty and Mount Gordon

Hindalco acquired Nifty and Mt. Gordon mines in 2003. The Birla Nifty copper mine consists

of an underground mine, heap leach pads and a solvent extraction and electrowinning

(SXEW) processing plant, which produces copper cathode. The Mt. Gordon mine consists

of an underground mine and a copper concentrate plant. Both Nifty and Mt. Gordon have a

long-term life of mine off-take agreement with Hindalco for supply of copper concentrate to

the copper smelter at Dahej. These together contribute to ~17% of the total concentrate

requirement of copper smelter at Dahej.

While the Nifty mine is stabilizing recovery at ~93% and has recoded an all time high

copper production of 59,661 MT in 2011, the Mt. Gordon mine has received its final

approval and its gradual ramp-up process has commenced as per the plan.

Successful turnaround of Novelis

With the consolidation of aluminium industry, especially in FRP, Novelis gained a significant

control over product pricing. In CY09, Novelis restructured its operations and this resulted in

a saving of about US$ 140 mn in CY09. This also helped Novelis reduce its cost of

operations. This pricing power, coupled with cost savings has helped Novelis improve its

margins and will further enhance the margins in the coming years. Novelis net income has

increased from loss of USD 1,910 mn in FY09 to profit of USD 160 mn in FY11 on accountof this successful turnaround of operations.

Novelis recently replaced its existing USD 2.5 bn debt with a debt of USD 4.0 bn at a

slightly higher interest rate of ~8.0%. Novelis plans to repay this debt partially in 2017 (USD

1.1 bn) and the rest in 2020. From this, USD 1.7 bn has gone to Hindalco and is reported as

return to common shareholders in its balance sheet. USD 1 bn from this has gone in

repaying Hindalcos acquisition loan. The rest USD 700 mn has been paid as dividend to

Hindalco.

After being hurt badly by the financial meltdown, Novelis has been reporting positive

EBITDA figures since Q4FY09 primarily aided by the expiry of ceiling contracts (wherein

one can not contractually pass on price increases to various customers). This has led to an

improvement in cash flows and is expected to ease down the debt burden in the balancesheet. Novelis has successfully refinanced its entire loan of US$ 2.5 bn in FY11 with a new

loan of US$ 4 bn with favorable covenants. This also helped standalone entity to get a

return on capital of US$ 1.7 bn, thereby reducing its balance sheet concerns.

Hindalco Management profile

Hindalcos management team consists of experienced individuals with strong credentials.

Mr. Kumar Mangalam Birla is the Chairman while Mr. D. Bhattacharya is the Managing

Director. Mr. S Talukdar is the CFO and Mr. Anil Malik is the Company Secretary. Mr. Philip

Martens is the President and CEO of Novelis Inc.

The employee strength of the company is 34,000 people from 15 different nationalities. The

group company was rated as the second best employer amongst 200 emerging companies

by Hewitt Global.

Brownfield Projects

Hindalcos ongoing brownfield expansion plans are progressing well notwithstanding the

various political, social and macroeconomic challenges. The company is confident that it will

achieve its plans in the revised timelines. The various brownfield expansions in execution

and that the company is currently pursuing are listed below.

Hirakud Smelter 51,600 tpa expansion and 100 MW captive power plant

Hirakud smelter capacity was raised from 155,000 tpa to 161,400 capacity in Q4FY11. By

2012 end, another 51,600 tpa capacity is scheduled to be added to Hirakud plant (which will

take the total capacity at Hirakud to 213,000 tpa) along with a 100 MW captive power plant.

The next phase of expansion at Hirakud is planned to increase its capacity to 360 ktpa

along with a corresponding increase in captive power from 467.5 MW to 967.5 MW. The

environmental clearance for this is already in place


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Hirakud FRP project Transfer from Novelis plant to Hirakud

This project involves transfer of all key equipment for FRP production from Novelis plant at

Rogerstone, UK to Hirakud. Also, orders placed for related and balancing equipment will

enable the company produce superior engineering products, including can-body stock, for

various markets. This project is expected to be complete by Q4FY12 or early FY13.

Belgaum Special Alumina Expansion of specials plant to 301 ktpa

The specials plant capacity at Belgaum will be raised from 189 ktpa to 301 ktpa, along with

a coal based co-generation plant. Currently, natural gas adaptation for its rotary kilns is

being evaluated.

Novelis South America and Asia

The company plans to invest USD 300 mn to expand the aluminium rolling operations in

Pinda to about 600 kt of aluminium sheets per year. This project is expected to come on

stream by 2012.

Novelis has announced plans to invest USD 400 mn in aluminium rolling and recycling

operations in South Korea. This will increase aluminium sheet capacity in Asia to 1,000 kt

annually. The new capacity is expected to be commissioned in financial year 2013

Greenfield Projects

Like the brownfield expansions, the greenfield expansions too are being executed as per

the plans. There had been some delays in the greenfield expansions in the past two years

due to various regulatory issues and concerns related to coal sourcing, but we feel that the

contribution from these projects should start by FY13 end with the commissioning of Mahan

smelter. The various greenfield projects under execution and in planning phase are

mentioned below.

Mahan Aluminium 359,000 tpa smelter and 900 MW power to start commissioning

during 4QFY12

Hindalco is set to start commissioning a 359,000 Aluminium smelter along with a captive

power plant of 900 MW during Q4FY12 at Bargwan, Madhya Pradesh. The estimated capexfor the project is about Rs 105 bn, of which Rs 77.85 bn is being financed by debt (Rs 60 bn

has already been drawn down). The major setback for the project lies in the fact that the

coal block of Mahan still awaits MoEF clearances. Hindalco will have to either source coal

from linkages or will have to import coal till clearances are received and coal mine is

developed. This may result in significantly higher operating cost.

Utkal Alumina 1.5 mn tpa refinery and 90 MW captive cogeneration plant by CY12

Hindalco is in the process of setting up a 1.5 mtpa alumina plant along with a 90 MW

captive cogeneration plant in Utkal, which having received all the clearances and license for

mining, is expected to be on stream by Q4FY13,. The output from Utkal plant will feed

alumina to the Mahan and the Aditya smelters. The estimated project cost for Utkal plant is

about Rs 72 bn, of which Rs 49.06 bn will be financed through debt (Rs 40 bn has alreadybeen drawn down). Captive bauxite mines of Utkal alumina project are located at Baphlimali

hills of Kashipur block in Rayagada district of Orissa state.

Aditya Aluminium, Aditya Refinery and Jharkhand Aluminium

Aditya Aluminium involves addition of 359,000 tpa smelter and 900 MW of power by

4QFY13. All major approvals are already in place for the project. The total estimated cost of

the project is Rs 105 bn.

Aditya Refinery includes a 1.5mn tpa refinery and 90 MW cogeneration plant to be

completed by 2014 in Orissa. The estimated project cost is about Rs 60 bn.

Jharkhand Aluminium involves addition of 359,000 tpa smelter and 900 MW of power by

2015 in Sonahatu, Jharkhand. The estimated project cost is about Rs 105 bn.


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Financials

Income Statement Balance Sheet

Y/E, Mar (Rs. mn) FY10 FY11 FY12E FY13E Y/E, Mar (Rs. mn) FY10 FY11 FY12E FY13E

Net Sales 607,221 720,779 779,536 808,267 Equity share capital 1984 1990 1990 1990

Growth (%) -7.9 18.7 8.2 3.7 Reserves & surplus 213,462 288,243 314,367 343,112

Expenditure 509,763 640,762 696,211 714,945 Net worth 215,446 290,233 316,357 345,102

Raw Materials 381,004 474,163 493,215 506,018 Minority Interest 17371.80 22169.40 22169.40 22169.40

Employee Cost 50,650 55,933 63,923 65,281 Secured Loans 107,627 137,358 227,358 267,358

Other Exp 78109 110666 139074 143646 Unsecured Loans 132,360 139,562 139,562 139,562

EBITDA 97,458 80,017 83,325 93,322 Loan Funds 239,987 276,920 366,920 406,920

Growth (%) 228.2 -17.9 4.1 12.0 Net deferred tax lia 39382.00 37595.90 37595.90 37595.90

EBITDA marg in (%) 16.0 11.1 10.7 11.5 Total Liabilities 512,187 626,918 743,042 811,787

Depreciation 27815.0 27500.1 31208.1 35201.3 Gross Block 456,221 482,068 547,068 617,068

EBIT 69,643 52,517 52,116 58,120 Less: Depreciation 166,216 158,014 189,223 224,424

EBIT marg in (%) 11.5 7.3 6.7 7.2 Net block 290,005 324,053 357,845 392,644

Other Income 3227.1 4308.5 6000.0 6000.0 CWIP 58008.00 131307.70 191307.70 211307.70

Interest expenses 11041.4 18393.4 16144.5 17904.5 Investment 112,455 108,549 118,549 128,549

PBT 61,829 38,432 41,972 46,216 Current Assets 231,884 279,848 296,833 306,890

Tax 18289 9638 10493 11554 Inventories 112,754 140,956 149,500 155,010

Effective tax rate (%) 29.6 25.1 25.0 25.0 Sundry debtors 65,437 79,996 85,429 88,577

Adjusted PAT 43,540 28,794 31,479 34,662 Cash & bank balance 21,954 25,563 24,253 24,313

(Profit)/loss from JV's/Ass/MI -4263.8 -4229.8 -2009.2 -2570.7 Loans & advances 31,171 31,989 36,307 37,645

Adjusted PAT after MI 39,276 24,564 29,470 32,091 Other current assets 569 1,345 1,345 1,345

Growth (%) 698.1 -37.5 20.0 8.9 Current lia & Prov 180,166 216,840 221,493 227,603

Net Marg in (%) 6.5 3.4 3.8 4.0 Current liabilities 130,996 164,692 179,654 184,704

E/O items -21.00 0.00 0.00 0.00 Provisions 49,170 52,149 41,839 42,900

Reported PAT 39,255 24,564 29,470 32,091 Net current assets 51,718 63,008 75,340 79,287

Growth (%) 711.2 -37.4 20.0 8.9 Total Assets 512,187 626,918 743,042 811,787

Cash Flow Key Ratios

Y/E, Mar (Rs. mn) FY10 FY11 FY12E FY13E Y/E, Mar FY10 FY11 FY12E FY13E

PBT (Ex-Other income) 61,808 38,432 41,972 46,216 Profitability (%)

Depreciation 27,815 27,500 31,208 35,201 EBITDA Margin 16.0 11.1 10.7 11.5

Interest Provided 11,041 18,393 16,144 17,904 Net Margin 6.5 3.4 3.8 4.0

Other Non-Cash items -38,891 -1,900 -2,009 -2,571 ROCE 13.6 8.4 7.0 7.2

Chg in working cap -5,984 -7,031 -13,643 -3,886 ROE 18.2 8.5 9.3 9.3

Tax paid -6,353 -13,131 -10,493 -11,554 RoIC 7.7 3.9 4.0 4.0

Operating Cashflow 49,437 62,263 63,179 81,311 Per Share Data (Rs)

Capital expenditure -22,539 -99,146 -125,000 -90,000 EPS 22.2 12.8 15.4 16.8Free Cash Flow 26,897 -36,883 -61,821 -8,689 CEPS 35.0 27.2 31.7 35.1

Other income 3,227 4,309 6,000 6,000 BVPS 121.6 151.6 165.3 180.3

Investments -16,143 5,074 -10,000 -10,000 DPS 1.5 1.5 1.5 1.5

Investing Cashflow -54,484 -67,104 -135,000 -100,000 Valuations (x)

Equity Capital Raised 27,543 99 0 0 PER 7.3 16.5 8.7 7.8

Loans Taken / (Repaid) -3,209 37,384 90,000 40,000 P/CEPS 4.6 7.8 4.2 3.7

Interest Paid -16,771 -25,410 -16,144 -17,904 P/BV 1.3 1.4 0.8 0.7

Dividend Paid & Others -3,274 -3,838 -3,346 -3,346 EV / Sales 0.6 0.8 0.6 0.6

Financing Cashflow 4,284 8,253 70,510 18,750 EV/ EBITDA 4 6.9 5.8 5.4

Net chg in cash -764 3,413 -1,311 61 Gearing Ratio (x)

Opening cash position 21,820 21,858 25,467 24,157 Net Debt/ Equity 0.5 0.5 0.7 0.7Closing cash position 21,858 25,467 24,157 24,217 Net Debt/EBIDTA 1.1 1.8 2.7 2.7


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