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Hindalco Industries (HNDL) - Co. Report - Dated - March 10, 2014




Axis Capital Limited


10 Mar 2014





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We visited Hindalco’s Utkal Alumina Refinery and bauxite mines in Odisha. Key takeaways:  Alumina refinery (Capacity: 1.5 mn tpa – Line 1: 0.75 mn tpa + Line 2: 0.75 mn tpa): Line 1 operating at 90% CU, Line 2 to start in Q1FY15 o Substantial ramp-up in volumes: Expected at 0.16 mn tonnes in Q4 vs. actual production of 0.09 mn tonnes in Q3. We now expect FY15 production at 0.8 mn tonnes and FY16 at 1.2 mn tonnes o Highly cost competitive: COP to come down to USD 185-190 per ton on full stabilization (one of the lowest globally) from current USD 225 per ton on captive bauxite and power o Highly scalable: Infrastructure in place to scale up to 3 mn tonnes; immediately scalable to 1.8 mn tonnes at USD 60 per ton against actual capex cost of USD 900 per ton  Bauxite mine (Long life of 40 years) o Current mine production at 12,000–14,000 tonnes per day (operating at approx 4 mn tpa vs. 8.5 mn tpa design capacity) o Highly competitive costs. Captive bauxite mining at USD 8 per ton o Logistics: Currently using trucks to transport from 20 km mine site; Long Distance Conveyor (LDC), currently 90% ready, will start in H2FY15  Key benefits o Integration of Aluminium smelters (a) Newly commissioned aluminium smelters (UP and Odisha) to ramp up volumes going forward and (b) Cost benefit of cheap alumina for its existing smelters  Key issues / challenges for Utkal Alumina projects o Stage II forest approval for ½ KM patch for LDC o Execution challenges for LDC given tough mountain terrain  Recommendation o Our LME price assumption for FY15 and FY16 is at USD 2,000/ton and USD 2,100/ton. Our EPS estimates are Rs 13.2 and Rs 14 respectively. Maintain HOLD with SOTP-based TP of Rs 130 (5x FY16E EV/EBITDA). This implies an upside of 4% from CMP of Rs 125 and stock trades at 5.9x FY15E EV/EBITDA and 5x FY16E EV/EBITDA Regards, Jagdishwar Toppo (Executive Director – Materials) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1103 Nitesh Jain (Sr VP – Materials) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1145 Sujan Sanisetty (Asst VP – Materials) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1122

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