Hindalco Industries Initiating Coverage - Emkay Global Financial ...

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Hindalco Industries Initiating Coverage Premiums on value-added products to remain stable 3000 2500 2000 1500 1000 500 0 2665 2625 1975 2395 2481 2238 2597 1871 2318 2350 2350 2257 2275 2250 985 1093 1062 1046 1050 1050 766 808 543 640 689 737 700 700 169 166 120 178 137 135 135 2007 2008 2009 2010 2011 2012E 2013E 3000 2500 2000 1500 1000 Rolled Extruded Redraw Rods Foils LME (RHS) Even with volatile LMEs, the premiums on value-added products to remain stable, largely protecting margins 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 valueadded 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) 100 80 60 40 20 0 34.2 43.8 35.0 36.0 37.0 49.8 44.1 47.1 19.0 22.0 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Standard Specials Source: Company, Emkay Research 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. Hindalco’s 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 Cathode 50% Others 13% DAP & Complexes 30% Gold 56% CC Rods 37% Sulphuric Acid 10% Silver 4% Source: Company, Emkay Research Emkay Research 16 December 2011 6
Hindalco Industries Initiating Coverage Strong value added product portfolio in aluminium segment and stable contribution from copper by- products to help mitigate LME volatility to a large extent 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, Hindalco’s 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 Inc’s rolling division, was spun off and incorporated as a separate entity in January 2005. Through acquisition of Novelis in May 2007, Hindalco became the world’s 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 flatrolled 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) Transportation 7% Others 14% Beverage Cans 54% Industrial 10% Foil and packaging 15% Source: Company, Emkay Research After expiry of legacy contracts, Novelis continues to deliver superior performance in terms of steady volumes and stronger EBITDA/ tonne 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… 1000 800 600 400 200 0 793 789 772 796 825 808 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 659 651 691 724 683 756 767 779 751 800 797 765 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Novelis Shipments (kt) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Source: Company, Emkay Research Emkay Research 16 December 2011 7
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