Angel Broking gives neutral rating to Hindalco

Angel Broking has made an analysis on why Hindalco project is delaying ahead.

Hindalco is on the verge of a massive expansion plan, wherein it is expanding its aluminium and alumina capacity three-fold over the coming 4-5 years. In light of recent events such as clearance of Mahan coal block by Group of Ministers (GoM), delay in projects, declining aluminium prices and rising input costs (crude oil derivatives), Angel Broking revisited Hindalco's financials for its upcoming projects under various scenarios. Their findings reveal that all three projects will generate around 17% RoE in a scenario where aluminium prices are at least at US$2,400/tonne (INR-USD53) and the projects have the backing of captive bauxite and coal mines - a scenario that looks remote in the coming 2-3 years.

When Hindalco planned this massive expansion, the foreseen scenario was not as gloomy as it is currently. The projects have faced several hurdles, especially in the past two years. Nevertheless, clearance to Mahan coal block from GoM is structurally positive for Hindalco. They are in the view that even if Mahan coal block receives clearance from the Cabinet soon, the captive coal mine is not expected to commence production until the next 18 months. On the other hand, Mahan smelter is expected to be ready for commissioning in 1HFY2013.

A decline in aluminium prices and higher input and coal costs have impacted profitability of the company's existing operations and lowered cash flow generation. This may also lead to further equity dilutions for the company's upcoming projects.

Angel Broking does not expect a meaningful spike in aluminium prices in the near term. Further, with slow clearances for the company's upcoming mines, further delays in its projects cannot be ruled out. Further, there has been little progress on the procedural clearance process for the company's Auranga coal mine and Talbira coal mine - which are expected to feed its upcoming Aditya and Jharkhand projects, respectively. While forest clearance is pending for Auranga mine, Talbira mine has received no major clearances as of now. While Jharkhand capex has not yet started, Aditya is at an advanced stage of completion, with commissioning due for 4QFY2013, while evidently coal availability from Auranga has low visibility as of now. Going forward, to generate over 15% RoE, Hindalco needs to get clearances for at least Auranga coal mine (for captive power generation at the upcoming Aditya smelter) alongside higher aluminium prices.

Outlook and valuation: Hindalco is expanding its capacities three-fold over the coming four-five years, and we are structurally positive on its integrated capacities. However, low aluminium prices, rising costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth in the next two years. If the Mahan coal block gets cleared by the Cabinet, it will be structurally positive for Hindalco. However, even then it will take at least 18 months for Hindalco to commence production from this block. So, considering the delays in the company's upcoming projects, Angel Broking recommends Neutral rating on the Hindalco stock.