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July 27, 2018 1
Rating: ACCUMULATE | CMP: Rs207 | TP: Rs260
Aleris acquisition-A good long-term deal; high debt to keep stock returns back-ended
Novelis, Hindalco’s (HNDL) wholly owned subsidiary, signed a definitive
agreement to USA based Aleris corp, a producer of aluminium rolled and
extruded products for total consideration of US$2.58bn. Aleris has effective
finished rolling capacity of 0.8mtpa with facilities in USA, Europe and China. It
has diversified sector base catering to Automotive, Building and construction,
Aerospace, Distribution and other specialty sectors. Transaction is valued at
7.2x FY20e EBITDA of USD360mn (with EBITDA/t of USD450 v/s Novelis’s
USD400). Deal looks reasonably priced with long-term advantage of diversified
product mix and achievable synergies of USD150mn with 50% of which is
achievable in first three years. However, the Balance sheet would again get
loaded with excess leverage (net debt of USD8.3bn in FY20e) pushing Net
Debt/EBITDA by ~30% to 3.2x in FY20e. We believe that concerns related to
ballooning of debt are more than factored given the steep fall in price in the last
one week. However, the return in stock would be more back-ended as market
would wait for operational performance of acquired entity. We maintain
Accumulate rating with TP of Rs260, EV/EBITDA of 6.5x FY20e.
To benefit from investment made by Aleris over the last 4-5 years: Aleris
recently completed ~USD900mn of investment made in high margin projects.
The returns of these investments are not fully captured in last twelve months
Adj. EBITDA. The benefit of such investments like 200ktpa Finishing mill in
Lewisport would be visible in full in FY20e with contracting of full capacity and
upward revision in contract prices. Novelis’s 200kt automotive finishing mill in
Changzhou, China would save USD200-300/t with the sourcing of cold coils
produced in Zhenjiang. This would require incremental investment of US$250-
300mn for setting up of cold coils.
Entry in to high margin Aerospace and Building & construction (B&C)
segments: Novelis’s 61%/20%/19% of shipments (FY18: ~3.2mn tonnes) are
constituted by Cans/Auto/Specialties. Post merger with Aleris, B&C, Truck
Trailer segment/Aerospace would constitute 8%/4% of the volumes (Combined
volume of 4.0mn tonnes) with reduction in Can’s share to 47% while
maintaining Auto’s share at 20%. Aleris enjoy market leadership in B&C and
Truck Trailer segment in North America. Auto’s share would increase to 30%
in next couple of years with the ongoing organic investments.
Leverage ratios to taper down sharply after two years of merger:
Novelis/consoldiated Net Debt/EBITDA would inch up to 3.8x-3.9x/3.3x-3.4x at
the close of transaction against 3.0x/3.0x at FY18. Led by higher cash flow
generation in Novelis and Aleris over next couple of years,
Novelis/Consolidated Net debt would fall to 3.0x/2.8x. Management expects
acquisition to be free cash accretive in first year of its merger.
Other key highlights of Analyst meet: 1) Annual maintenance capex
required for Aleris facilities at US$90-100mn 2) Deal expected to close in 9-15
months 3) Expect savings of 200-250bps on assumed debt of US$1.8bn 4)
Earn-out linked to achievement beyond base business plan during CY18-CY20
for North America with cap of US$50mn.
Hindalco Industries (HNDL IN)
July 27, 2018
Event Update
Change in Estimates | ☑ Target | Reco
Change in Estimates
Current Previous
FY19E FY20E FY19E FY20E
Rating ACCUMULATE ACCUMULATE
Target Price 260 275
Sales (Rs. m) 1,267,220 1,290,091 1,267,220 1,313,422
% Chng. - (1.8)
EBITDA (Rs. m) 147,256 145,482 147,256 150,067
% Chng. - (3.1)
EPS (Rs.) 18.2 18.0 18.2 19.4
% Chng. - (7.2)
Key Financials
FY17 FY18 FY19E FY20E
Sales (Rs. bn) 1,002 1,185 1,267 1,290
EBITDA (Rs. bn) 124 142 147 145
Margin (%) 12.4 12.0 11.6 11.3
PAT (Rs. bn) 19 39 41 40
EPS (Rs.) 8.5 17.3 18.2 18.0
Gr. (%) 5.0 102.7 5.1 (1.3)
DPS (Rs.) 1.1 1.2 1.3 1.3
Yield (%) 0.5 0.6 0.6 0.6
RoE (%) 4.4 8.0 7.7 7.1
RoCE (%) 7.3 9.0 9.2 8.8
EV/Sales (x) 0.9 0.7 0.7 0.6
EV/EBITDA (x) 7.4 6.2 5.9 5.7
PE (x) 24.2 11.9 11.3 11.5
P/BV (x) 1.0 0.9 0.8 0.8
Key Data HALC.BO | HNDL IN
52-W High / Low Rs.284 / Rs.192
Sensex / Nifty 36,985 / 11,167
Market Cap Rs.464bn/ $ 6,753m
Shares Outstanding 2,245m
3M Avg. Daily Value Rs.4491.57m
Shareholding Pattern (%)
Promoter’s 34.67
Foreign 28.09
Domestic Institution 19.11
Public & Others 18.13
Promoter Pledge (Rs bn) -
Stock Performance (%)
1M 6M 12M
Absolute (7.4) (20.2) (6.8)
Relative (11.1) (22.3) (18.4)
Kamlesh Bagmar
kamleshbagmar@plindia.com | 91-22-66322237
Amit Khimesra
amitkhimesra@plindia.com | 91-22-66322244
Hindalco Industries
July 27, 2018 2
Region wise location of Aleris’s plants
Plant Region Location
North America
Clayton, New Jersey
Buckhannon, West Virginia
Ashville, Ohio
Richmond, Virginia
Uhrichsville, Ohio
Lewisport, Kentucky
Davenport, Iowa - Plant1
Davenport, Iowa - Plant2
Lincolnshire, Illinois
Europe
Duffel, Belgium
Koblenz, Germany
Voerde, Germany
Asia Pacific Zhenjiang, PRC, China
Source: Company, PL
Segment wise revenue breakup of USD in LTM
N.America building &
construction, 24%
Distribution, 22%
Automotive, 13%
Aerospace, 12%
Truck Trailer, 7%
Heat Exchanger,
9%
Others, 13%
Source: Company, PL
Geography wise shipments in kt and share
North America
462
Europe317
Asia Pacif ic27
Intra-entity shipments
-7
Source: Company, PL
Hindalco Industries
July 27, 2018 3
Recent investments by Aleris expected to drive earnings momentum
Source: Company, PL
Geography wise revenue of Aleris
1,5
42
1,3
25
1,4
43
1,4
02
1,3
35
1,2
23
1,3
01
1,3
46
1,3
00
1,1
95
1,5
62
1,5
33
1,3
65
1,4
68
21
53
96
101
122
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2011 2012 2013 2014 2015 2016 2017
US
$ m
n
Europe North America Asia Pacific
Source: Company, PL
Hindalco Industries
July 27, 2018 4
Geography wise Adj EBITDA of Aleris 152
137
115
121 1
49
151
128
105
111
76 9
6
109
81 97
-0
- - 10
13
-20
-
20
40
60
80
100
120
140
160
2011 2012 2013 2014 2015 2016 2017
US
$ m
n
Europe North America Asia Pacific
Source: Company, PL
Geography wise Adj EBITDA/t of Aleris
283
281
205
199
221
167
209
482
457
388
400 4
76
463
402
0 -
-83
- -
460
468
-200
-100
0
100
200
300
400
500
600
2011 2012 2013 2014 2015 2016 2017
US
$ /
to
nn
e
North America Europe Asia Pacific
Source: Company, PL
Product portfolio diversification (Pre & Post acquisition)
Source: Company, PL
Hindalco Industries
July 27, 2018 5
US$900mn Strategic investments by Aleris in past few years
Source: Company, PL
Strengthens competitive positioning in Asia with Novelis and Aleris
Source: Company, PL
Hindalco Industries
July 27, 2018 6
US$360mn Adj. EBITDA in Aleris expected by Q4FY20
202
55
65
38
360
0
50
100
150
200
250
300
350
400
Q1'18 LTM Qualificationsrelated to outage
add backs *
Contracted AutoEBITDA
Auto Opportunity(RemainingFinishingCapacity)
Adjusted LTM +Auto Forward
EBITDA
Source: Company, PL * Includes one-time add backs for Lewisport outage of US$30mn, Duffel
North America support of US$4mn and Wingskin qualification impact at Koblenz and Zhenjiang of US$4mn
US$150mn Identified run rate of cost synergies
Source: Company, PL
Hindalco Industries
July 27, 2018 7
Financials
Income Statement (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Net Revenues 1,001,838 1,185,053 1,267,220 1,290,091
YoY gr. (%) 1.4 18.3 6.9 1.8
Cost of Goods Sold 558,997 723,229 776,897 793,992
Gross Profit 442,841 461,824 490,323 496,099
Margin (%) 44.2 39.0 38.7 38.5
Employee Cost 85,460 87,392 93,877 95,943
Other Expenses 98,826 140,349 150,764 154,081
EBITDA 124,474 142,456 147,256 145,482
YoY gr. (%) 41.2 14.4 3.4 (1.2)
Margin (%) 12.4 12.0 11.6 11.3
Depreciation and Amortization 44,688 44,536 47,942 50,032
EBIT 79,786 97,919 99,314 95,450
Margin (%) 8.0 8.3 7.8 7.4
Net Interest 57,424 50,005 47,558 44,698
Other Income 11,110 10,476 11,213 11,425
Profit Before Tax 33,395 75,551 62,969 62,178
Margin (%) 3.3 6.4 5.0 4.8
Total Tax 14,326 25,119 21,954 21,628
Effective tax rate (%) 42.9 33.2 34.9 34.8
Profit after tax 19,070 50,431 41,015 40,549
Minority interest (174) 120 184 232
Share Profit from Associate (246) (256) (262) (267)
Adjusted PAT 19,041 38,600 40,569 40,050
YoY gr. (%) 14.2 102.7 5.1 (1.3)
Margin (%) 1.9 3.3 3.2 3.1
Extra Ord. Income / (Exp) (44) 11,455 - -
Reported PAT 18,998 50,055 40,569 40,050
YoY gr. (%) (857.6) 163.5 (19.0) (1.3)
Margin (%) 1.9 4.2 3.2 3.1
Other Comprehensive Income - - - -
Total Comprehensive Income 18,998 50,055 40,569 40,050
Equity Shares O/s (m) 2,227 2,227 2,227 2,227
EPS (Rs) 8.5 17.3 18.2 18.0
Source: Company Data, PL Research
Balance Sheet Abstract (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Non-Current Assets
Gross Block 1,040,510 1,057,043 1,105,119 1,131,035
Tangibles 1,040,510 1,057,043 1,105,119 1,131,035
Intangibles - - - -
Acc: Dep / Amortization 364,991 409,528 457,470 507,502
Tangibles 364,991 409,528 457,470 507,502
Intangibles - - - -
Net fixed assets 675,518 647,515 647,649 623,533
Tangibles 675,518 647,515 647,649 623,533
Intangibles - - - -
Capital Work In Progress 20,555 30,905 55,405 72,945
Goodwill 171,350 171,350 171,350 171,350
Non-Current Investments 68,293 68,036 67,775 67,508
Net Deferred tax assets (20,168) (23,584) (27,458) (31,183)
Other Non-Current Assets 8,910 8,910 8,910 8,910
Current Assets
Investments 89,518 79,518 79,518 79,518
Inventories 182,914 191,811 205,820 210,271
Trade receivables 82,748 92,193 99,459 101,569
Cash & Bank Balance 82,612 72,019 47,956 61,062
Other Current Assets 46,992 48,349 48,958 49,128
Total Assets 1,465,105 1,448,208 1,471,240 1,484,686
Equity
Equity Share Capital 2,227 2,227 2,227 2,227
Other Equity 458,361 505,529 542,949 579,587
Total Networth 460,588 507,756 545,176 581,814
Non-Current Liabilities
Long Term borrowings 637,515 569,515 538,515 507,515
Provisions 69,602 69,602 69,602 69,602
Other non current liabilities 5,224 5,224 5,224 5,224
Current Liabilities
ST Debt / Current of LT Debt - - - -
Trade payables 178,581 178,979 191,534 195,384
Other current liabilities 79,414 79,414 79,414 79,414
Total Equity & Liabilities 1,465,105 1,448,208 1,471,240 1,484,686
Source: Company Data, PL Research
Hindalco Industries
July 27, 2018 8
Cash Flow (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E Year
PBT 33,149 58,391 62,969 62,178
Add. Depreciation 44,572 44,536 47,942 50,032
Add. Interest 57,424 50,005 47,558 44,698
Less Financial Other Income 11,110 10,476 11,213 11,425
Add. Other (7,165) (10,476) (11,213) (11,425)
Op. profit before WC changes 127,980 142,456 147,256 145,482
Net Changes-WC 6,691 (21,206) (10,168) (3,332)
Direct tax (7,797) (21,703) (18,080) (17,903)
Net cash from Op. activities 126,875 99,547 119,007 124,247
Capital expenditures (28,696) (9,723) (72,576) (43,456)
Interest / Dividend Income - - - -
Others 811 10,476 11,213 11,425
Net Cash from Invt. activities (27,885) 753 (61,363) (32,031)
Issue of share cap. / premium 33,141 - - -
Debt changes (25,400) (68,000) (31,000) (31,000)
Dividend paid (2,479) (2,887) (3,149) (3,412)
Interest paid (60,754) (50,005) (47,558) (44,698)
Others (30) 10,000 - -
Net cash from Fin. activities (55,523) (110,892) (81,708) (79,110)
Net change in cash 43,467 (10,593) (24,064) 13,107
Free Cash Flow 98,179 89,823 62,681 80,791
Source: Company Data, PL Research
Quarterly Financials (Rs m)
Y/e Mar Q2FY18 Q3FY18 Q4FY18 Q1FY19
Net Revenue 103,082 110,228 116,811 107,037
YoY gr. (%) 14.4 18.4 5.9 9.6
Raw Material Expenses 59,076 64,336 70,653 95,163
Gross Profit 44,006 45,892 46,158 11,874
Margin (%) 42.7 41.6 39.5 11.1
EBITDA 13,899 13,117 12,576 11,874
YoY gr. (%) 21.1 (5.6) (4.1) (5.6)
Margin (%) 13.5 11.9 10.8 11.1
Depreciation / Depletion 3,804 3,822 4,598 3,950
EBIT 10,095 9,295 7,978 7,924
Margin (%) 9.8 8.4 6.8 7.4
Net Interest 4,836 4,828 4,464 4,400
Other Income 1,872 2,994 2,049 2,300
Profit before Tax 6,076 6,307 5,563 5,824
Margin (%) 5.9 5.7 4.8 5.4
Total Tax 2,146 2,552 1,794 1,922
Effective tax rate (%) 35.3 40.5 32.2 33.0
Profit after Tax 3,930 3,755 3,770 3,902
Minority interest - - - -
Share Profit from Associates - - - -
Adjusted PAT 4,612 4,442 3,770 3,902
YoY gr. (%) 21.4 38.6 (25.0) 8.6
Margin (%) 4.5 4.0 3.2 3.6
Extra Ord. Income / (Exp) (682) (686) - -
Reported PAT 3,930 3,755 3,770 3,902
YoY gr. (%) (10.5) 17.2 (25.0) 34.8
Margin (%) 3.8 3.4 3.2 3.6
Other Comprehensive Income - - - -
Total Comprehensive Income 3,930 3,755 3,770 3,902
Avg. Shares O/s (m) 2,228 2,229 2,229 2,229
EPS (Rs) 2.1 2.0 1.7 1.8
Source: Company Data, PL Research
Key Financial Metrics
Y/e Mar FY17 FY18 FY19E FY20E
Per Share(Rs)
EPS 8.5 17.3 18.2 18.0
CEPS 28.6 37.3 39.7 40.4
BVPS 206.8 228.0 244.8 261.2
FCF 44.1 40.3 28.1 36.3
DPS 1.1 1.2 1.3 1.3
Return Ratio(%)
RoCE 7.3 9.0 9.2 8.8
ROIC 5.0 7.0 6.8 6.6
RoE 4.4 8.0 7.7 7.1
Balance Sheet
Net Debt : Equity (x) 1.0 0.8 0.8 0.6
Net Working Capital (Days) 32 32 33 33
Valuation(x)
PER 24.2 11.9 11.3 11.5
P/B 1.0 0.9 0.8 0.8
P/CEPS 28.6 37.3 39.7 40.4
EV/EBITDA 7.4 6.2 5.9 5.7
EV/Sales 0.9 0.7 0.7 0.6
Dividend Yield (%) 0.5 0.6 0.6 0.6
Source: Company Data, PL Research
Key Operating Metrics
Y/e Mar FY17 FY18 FY19E FY20E
Aluminium (Al) prod (t) 1,266,000 1,276,000 1,276,000 1,276,000
Copper (Cu) prod (t) 376,000 400,000 400,000 400,000
LME-Al (USD/t) 1,688 2,030 2,100 2,100
LME-Cu (USD/t) 5,152 5,800 6,000 6,200
Novelis (volumes kt) 3,067 3,190 3,253 3,319
Novelis-EBITDA/t (US$) 357 382 385 385
Novelis-EBITDA (US$ mn) 1,096 1,218 1,253 1,278
Source: Company Data, PL Research
Hindalco Industries
July 27, 2018 9
Price Chart Recommendation History
No. Date Rating TP (Rs.) Share Price (Rs.)
1 10-Aug-17 BUY 260 238
2 12-Aug-17 BUY 280 221
3 14-Sep-17 BUY 280 248
4 9-Oct-17 BUY 280 251
5 3-Nov-17 BUY 315 270
6 3-Nov-17 BUY 315 269
7 17-Nov-17 BUY 315 255
8 13-Dec-17 BUY 315 234
9 10-Jan-18 BUY 315 272
10 1-Feb-18 BUY 315 257
Analyst Coverage Universe
Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)
1 ACC BUY 1750 1311
2 Ambuja Cement Accumulate 250 208
3 Coal India BUY 340 261
4 Heidelberg Cement India BUY 180 139
5 Hindalco Industries Accumulate 275 226
6 Hindustan Zinc Accumulate 340 277
7 Jindal Steel & Power BUY 330 209
8 JK Lakshmi Cement Accumulate 381 314
9 JSW Steel BUY 450 317
10 NMDC Accumulate 145 105
11 Shree Cement Hold 17235 15978
12 Steel Authority of India Hold 86 81
13 Tata Steel BUY 727 566
14 The Ramco Cements Hold 790 704
15 Ultratech Cement Hold 4000 3849
PL’s Recommendation Nomenclature (Absolute Performance)
Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
61
121
180
240
300
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
(Rs)
Hindalco Industries
July 27, 2018 10
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We/I, Mr. Kamlesh Bagmar- CA, Mr. Amit Khimesra- MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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