Hindalco Industries (HINDAL) |...

14
May 31, 2017 ICICI Securities Ltd | Retail Equity Research Result Update In line performance, de-leveraging augurs well Hindalco reported a healthy set of Q4FY17 numbers wherein the topline came in higher than our estimate on the back of better-than- expected copper sales volume while EBITDA and PAT were broadly in line with our estimates. Gross revenues were at | 11747.1 crore. After adjusting for excise, net revenues was at | 11026.1 crore, up 18.4% QoQ, 27.4% YoY and higher than our estimate of | 9909.3 crore The aluminium segment reported sales of ~328000 tonne, a tad lower than our estimate of ~330000 tonne. Copper sales came in at ~114000 tonne, higher than our estimate of ~100000 tonne. The aluminium segment reported revenues of | 5547.9 crore, up 9.4% YoY while copper revenues came in at | 6202 crore, up 47.9% YoY Reported EBITDA was at | 1347.2 crore (up 13.7% QoQ, 14.4% YoY), broadly in line with our estimate of | 1386.7 crore. Reported EBITDA margin was at 12.2% Ensuing reported PAT was at | 502.8 crore (up 25.3% YoY, 57.0% QoQ) in line with our estimate of | 501.6 crore De-leveraging to strengthen balance sheet… The management continues to focus on its strategic initiative of deleveraging the balance sheet. During FY17, the company prepaid long term loan amounting to | 1031 crore. Furthermore, the company in April 2017 prepaid debt to the tune of | 4505 crore, aided by QIP. Total repayment of | 5536 crore till date has resulted in significant improvement in consolidated net debt/EBITDA of 3.74x as on March 31, 2017 from 6.29x in the prior year. In the balance part of FY18, the company chalked out debt repayment plan of ~| 2200 crore (paid largely through internal accruals). Also, the capex is estimated to be nominal to the tune of ~| 1000 crore for Indian operations. Thus, going forward, deleveraging coupled with low capex is likely to impart strength to the balance sheet in the medium term, which augurs well for the company. Novelis reports strong performance in Q4FY17… Novelis’ Q4FY17 numbers were above our estimates wherein healthy growth in auto shipments (up 26% YoY) aided the performance. Total flat rolled product (FRP) shipments came in at 789 KT, up 1 KT YoY, higher than our estimate of 775 KT. The company reported an adjusted EBITDA of US$292 million up 5% YoY (our estimate: US$271 million). The EBITDA/tonne came in at US$370/tonne, higher than our estimate of US$350/tonne. Going forward, we have modelled EBITDA/tonne US$375/tonne for FY18E and US$400 for FY19E. Balance sheet to strengthen, going forward; upgrade to BUY… Hindalco continued to deliver a steady performance in Q4FY17, marked by higher volumes and realisations from both aluminium and copper segment. Further, a strong performance of Novelis driven by increased automotive shipments remained a highlight for the quarter and year. We value Hindalco on an SOTP basis, thereby arriving at a target price of | 225. We upgrade the stock from HOLD to BUY recommendation. The deleveraging of the balance sheet coupled with low capex augurs well for the company. Rating matrix Rating : Buy Target : | 225 Target Period : 12 Months Potential Upside : 13% What’s Changed? Target Changed from | 180 to | 225 EPS FY18E Changed from | 17.3 to | 18.2 EPS FY19E Changed from | 22.2 to | 23.5 Rating Changed from Hold to Buy Quarterly Performance (Standalone) Q4FY17 Q4FY16 YoY (%) Q3FY16 QoQ (%) Revenue 11,026.1 8,654.4 27.4 9,313.6 18.4 Adj. EBITDA 1,347.2 1,177.6 14.4 1,185.3 13.7 EBITDA (%) 12.2 13.6 -139 bps 12.7 -51 bps Rep. PAT 502.8 401.3 25.3 320.2 57.0 Key Financials (Cons) | Crore FY16E FY17E FY18E FY19E Net Sales 100053.8 100183.8 118473.8 128194.0 EBITDA 8724.0 12435.9 13325.4 14647.3 Rep Net Profit 263.3 1881.8 4058.5 5225.7 EPS (|) 1.3 8.4 18.2 23.5 Valuation summary FY16E FY17E FY18E FY19E P/E 156.8 23.7 11.0 8.5 Target P/E 176.8 26.7 12.4 9.6 EV / EBITDA 11.1 7.6 6.8 5.7 P/BV 1.1 0.9 0.8 0.8 RoNW 0.7 4.1 8.1 9.5 RoCE 4.3 6.9 7.4 8.6 Stock data Stock Data Market Capitalization | 45400 crore Total Debt (FY17 P) | 69611 crore Cash and Cash equivalents (FY17 P) | 17213 crore EV | 97798 crore 52 week H/L (|) 210 / 98 Equity capital | 222.72 crore Face value | 1 Price performance (%) Return % 1M 3M 6M 12M Hindustan Zinc -9.2 -13.8 -6.0 54.2 Vedanta 0.6 -5.5 6.5 130.0 Hindalco Ind 1.9 10.2 15.6 97.3 Research Analyst Dewang Sanghavi [email protected] Akshay Kadam [email protected] Hindalco Industries (HINDAL) | 200

Transcript of Hindalco Industries (HINDAL) |...

May 31, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

In line performance, de-leveraging augurs well

Hindalco reported a healthy set of Q4FY17 numbers wherein the

topline came in higher than our estimate on the back of better-than-

expected copper sales volume while EBITDA and PAT were broadly in

line with our estimates. Gross revenues were at | 11747.1 crore. After

adjusting for excise, net revenues was at | 11026.1 crore, up 18.4%

QoQ, 27.4% YoY and higher than our estimate of | 9909.3 crore

The aluminium segment reported sales of ~328000 tonne, a tad lower

than our estimate of ~330000 tonne. Copper sales came in at ~114000

tonne, higher than our estimate of ~100000 tonne. The aluminium

segment reported revenues of | 5547.9 crore, up 9.4% YoY while

copper revenues came in at | 6202 crore, up 47.9% YoY

Reported EBITDA was at | 1347.2 crore (up 13.7% QoQ, 14.4% YoY),

broadly in line with our estimate of | 1386.7 crore. Reported EBITDA

margin was at 12.2%

Ensuing reported PAT was at | 502.8 crore (up 25.3% YoY, 57.0%

QoQ) in line with our estimate of | 501.6 crore

De-leveraging to strengthen balance sheet…

The management continues to focus on its strategic initiative of

deleveraging the balance sheet. During FY17, the company prepaid long

term loan amounting to | 1031 crore. Furthermore, the company in April

2017 prepaid debt to the tune of | 4505 crore, aided by QIP. Total

repayment of | 5536 crore till date has resulted in significant

improvement in consolidated net debt/EBITDA of 3.74x as on March 31,

2017 from 6.29x in the prior year. In the balance part of FY18, the

company chalked out debt repayment plan of ~| 2200 crore (paid largely

through internal accruals). Also, the capex is estimated to be nominal to

the tune of ~| 1000 crore for Indian operations. Thus, going forward,

deleveraging coupled with low capex is likely to impart strength to the

balance sheet in the medium term, which augurs well for the company.

Novelis reports strong performance in Q4FY17…

Novelis’ Q4FY17 numbers were above our estimates wherein healthy

growth in auto shipments (up 26% YoY) aided the performance. Total flat

rolled product (FRP) shipments came in at 789 KT, up 1 KT YoY, higher

than our estimate of 775 KT. The company reported an adjusted EBITDA

of US$292 million up 5% YoY (our estimate: US$271 million). The

EBITDA/tonne came in at US$370/tonne, higher than our estimate of

US$350/tonne. Going forward, we have modelled EBITDA/tonne

US$375/tonne for FY18E and US$400 for FY19E.

Balance sheet to strengthen, going forward; upgrade to BUY…

Hindalco continued to deliver a steady performance in Q4FY17, marked

by higher volumes and realisations from both aluminium and copper

segment. Further, a strong performance of Novelis driven by increased

automotive shipments remained a highlight for the quarter and year. We

value Hindalco on an SOTP basis, thereby arriving at a target price of

| 225. We upgrade the stock from HOLD to BUY recommendation. The

deleveraging of the balance sheet coupled with low capex augurs well for

the company.

Rating matrix

Rating : Buy

Target : | 225

Target Period : 12 Months

Potential Upside : 13%

What’s Changed?

Target Changed from | 180 to | 225

EPS FY18E Changed from | 17.3 to | 18.2

EPS FY19E Changed from | 22.2 to | 23.5

Rating Changed from Hold to Buy

Quarterly Performance (Standalone)

Q4FY17 Q4FY16 YoY (%) Q3FY16 QoQ (%)

Revenue 11,026.1 8,654.4 27.4 9,313.6 18.4

Adj. EBITDA 1,347.2 1,177.6 14.4 1,185.3 13.7

EBITDA (%) 12.2 13.6 -139 bps 12.7 -51 bps

Rep. PAT 502.8 401.3 25.3 320.2 57.0

Key Financials (Cons)

| Crore FY16E FY17E FY18E FY19E

Net Sales 100053.8 100183.8 118473.8 128194.0

EBITDA 8724.0 12435.9 13325.4 14647.3

Rep Net Profit 263.3 1881.8 4058.5 5225.7

EPS (|) 1.3 8.4 18.2 23.5

Valuation summary

FY16E FY17E FY18E FY19E

P/E 156.8 23.7 11.0 8.5

Target P/E 176.8 26.7 12.4 9.6

EV / EBITDA 11.1 7.6 6.8 5.7

P/BV 1.1 0.9 0.8 0.8

RoNW 0.7 4.1 8.1 9.5

RoCE 4.3 6.9 7.4 8.6

Stock data

Stock Data

Market Capitalization | 45400 crore

Total Debt (FY17 P) | 69611 crore

Cash and Cash equivalents (FY17 P) | 17213 crore

EV | 97798 crore

52 week H/L (|) 210 / 98

Equity capital | 222.72 crore

Face value | 1

Price performance (%)

Return % 1M 3M 6M 12M

Hindustan Zinc -9.2 -13.8 -6.0 54.2

Vedanta 0.6 -5.5 6.5 130.0

Hindalco Ind 1.9 10.2 15.6 97.3

Research Analyst

Dewang Sanghavi

[email protected]

Akshay Kadam

[email protected]

Hindalco Industries (HINDAL) | 200

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis

Q4FY17 Q4FY17E Q4FY16 YoY (%) Q3FY16 QoQ (%) Comments

Total Operating Income 11,026.1 9,909.3 8,654.4 27.4 9,313.6 18.4 The topline came in above our estimates

Other Income 222.6 296.3 209.5 6.2 220.0 1.2 Other income came in lower than our estimates

Total Manufacturing Expense 9,678.9 8,522.5 7,476.8 29.5 8,128.3 19.1

Adjusted EBITDA 1,347.2 1,386.7 1,177.6 14.4 1,185.3 13.7 EBITDA came broadly in line with our estimates

Adjusted EBITDA Margin (%) 12.2 14.0 13.6 -139 bps 12.7 -51 bps

Depreciation 541.1 387.0 340.5 58.9 358.0 51.2

Interest 380.2 579.4 573.6 -33.7 587.9 -35.3

Exceptional item - - - - 0.2 -100.0

PBT 648.5 716.6 473.1 37.1 459.2 41.2

Tax Outgo 145.7 215.0 71.8 102.9 139.0 4.8

PAT 502.8 501.6 401.3 25.3 320.2 57.0 PAT came in line with our estimates

Key Metrics

Total Copper sales (tonne) 114,000 100,000 97,000 17.5 97,000 17.5 Copper sales were significantly higher than our estimates

Total Aluminium sales (tonne) 328,000 330,100 328,600 -0.2 310,000 5.8 Aluminium sales were marginally lower than our estimates

Novelis, Rolled Product Shipments (Kt) 789 775 788 0.1 750 5.2 Novelis shipments came in higher than our estimates

Novelis, EBITDA/tonne (US$/tonne) 370 350 335 10.4 340 8.8 Novelis EBITDA/t came in higher than our estimates

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) New Old % Change New Old % Change

Revenue 100,183.8 118,473.8 114,532.1 3.4 128,194.0 121,742.0 5.3 Upward revised estimates on all parameters for both years

EBITDA 12,435.9 13,325.4 12,996.1 2.5 14,647.3 14,101.3 3.9

EBITDA Margin (%) 12.4 11.2 11.3 -10 bps 11.4 11.6 -16 bps

PAT 1,881.8 4,058.5 3,579.5 13.4 5,225.7 4,590.4 13.8

EPS (|) 8.4 18.2 17.3 5.3 23.5 22.2 5.7

FY17 P

FY18E FY19E

Source: Company, ICICIdirect.com Research

Assumptions

FY17 FY18E FY19E FY18E FY19E

Total Copper Production (Kt) 376 397 397 397 397 Maintained estimates

Total Aluminium Production (Kt) 1,266 1,271 1,284 1,168 1,176 Maintained estimates

Novelis, Rolled Product Shipments (Kt) 3,067 3,214 3,535 3,214 3,535 Maintained estimates

Novelis, EBITDA/tonne (US$/tonne) 354 375 400 375 400 Maintained estimates

LME Aluminium (US$/tonne) 1,688 1,900 1,900 1,800 1,700 Upward revised LME estimates

LME Copper (US$/tonne) 5157 6250 6500 6250 6500 Maintained LME estimates

US$: INR 67 65 65 66 67

Comments

Current Earlier

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

Company Analysis

Hindalco is a metal major with business interests in copper smelting &

aluminium manufacturing domestically. The company is also a leading

aluminium converter globally through subsidiary Novelis.

Aluminium business leads way…

On the domestic front, Hindalco has expanded its aluminium capacity to

1.3 MTPA (from 0.56 MTPA earlier) and alumina capacity to 3.0 MTPA

(from 1.5 MTPA earlier). Aluminium capacity expansion was carried out

through two greenfield projects viz. Mahan and Aditya while alumina

capacity expansion through the Utkal alumina refinery. With all the three

projects (Utkal, Mahan and Aditya) operating at optimum capacity, the

company enjoyed economies of scale during Q4FY17. We expect alumina

production to gradually increase to 2.98 MT while aluminium production

is expected to increase to 1.28 MT.

Exhibit 1: Alumina production

1631

2240

26802886 2951 2981

0

500

1000

1500

2000

2500

3000

3500

FY14 FY15 FY16 FY17 FY18E FY19E

KT

Source: Company, ICICIdirect.com Research

Exhibit 2: Aluminium (primary metal) production

594

809

1133

1266 1271 1284

0

200

400

600

800

1000

1200

1400

FY14 FY15 FY16 FY17 FY18E FY19E

KT

Source: Company, ICICIdirect.com Research

Copper segment surprises positively in terms of volumes for Q4FY17…

The copper segment reported a significant improvement in performance

during Q4FY17 driven by improvement in demand scenario on the back

of lower imports of copper and higher by-products realisation (sulphuric

acid and di-ammonium phosphate). During the quarter, cathode

production volumes increased 18% QoQ at 111 KT while the CC rod

production was up 6 KT to 38 KT. The company reported a segmental

EBITDA of | 497 crore up 23% YoY.

Exhibit 3: Copper production trend

330

386 388 376397 397

0

50

100

150

200

250

300

350

400

450

FY14 FY15 FY16 FY17 FY18E FY19E

KT

Copper production

Source: Company, ICICIdirect.com Research

Exhibit 4: Copper division topline and EBIT trend

20451

18362

19408

16398

17342

1516

1467 1456

1294

1369

0

200

400

600

800

1000

1200

1400

1600

12000

13000

14000

15000

16000

17000

18000

19000

20000

21000

FY15 FY16 FY17 FY18E FY19E

| c

rore

| c

rore

Topline (LHS) EBIT (RHS)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 4

Novelis performance

For the quarter, Novelis’ total shipments of rolled aluminium products

stood at 789 kilotonne (KT) up 1 Kt YoY (our estimate: 775 KT). Sales

came in at US$2.6 billion, up 9% YoY, driven by higher automotive

shipments, which increased 26% YoY during the quarter.

Adjusted EBITDA for Q4FY17 increased to US$292 million, up 5% from

the prior year period. The metal lag impact during the quarter was

negligible as local market premium volatility reduced. The EBITDA during

the quarter was supported by higher automotive shipments, productivity

gains and lower metal cost. The resulting EBITDA/tonne was at

US$370/tonne, higher than our estimate of US$350/tonne.

Novelis reported net income attributable to our common shareholder of

US$47 million for Q4FY17, compared to a net income of US$29 million in

the prior year period. Excluding tax-effected special items in both periods,

Q4FY17 net income was at $73 million from $50 million in the prior year.

Exhibit 5: Novelis rolled product shipments

2895

3101

3123

3067 3

214

3535

2400

2600

2800

3000

3200

3400

3600

FY14 FY15 FY16 FY17E FY18E FY19E

KT

Source: Company, ICICIdirect.com Research

Exhibit 6: Novelis EBITDA/tonne trend

289 288

229

354375

400

0

50

100

150

200

250

300

350

400

450

FY14 FY15 FY16E FY17E FY18E FY19E

US

$ M

illion

EBITDA/tonne

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 5

Key conference call highlights (Hindalco)

Aluminium segment

The alumina production (including Utkal) during the quarter was up

1% YoY to 709 KT. The same for full year rose 8% YoY to 2886 KT

Metal production for the quarter was at 317 KT, up 3% YoY, while that

for the full year came in at 1266 KT, up 12% YoY

The value added production including wire rods increased 6% YoY in

Q4FY17 to 125 KT. FY17 production was at 481 KT, up 14% YoY

Aluminium facilities have ramped up and are operating at designed

capacities

During the year, the aluminium segment reported a strong

performance on account of steady plant operations, higher volumes,

supportive macro factors and lower input costs. However, input costs

(crude derivatives) started hardening in Q4FY17

Revenues from the segment for Q4FY17 were at | 5548 crore, up 9%

YoY. For full year FY17, revenues increased 9% to | 19986 crore. The

aluminium segment reported an EBITDA of | 918 crore for Q4FY17.

For the full year, same was at | 3473 crore, up 73% YoY

Utkal refinery during the year reported a strong performance on the

back of stable operations. During FY17, international alumina prices

were relatively lower impacting EBITDA. However, lower alumina

prices are favourable for Hindalco as it results in lower input cost. The

full year FY17 EBITDA of Utkal was at | 672 crore, down 6% YoY

During FY17, LME prices were up 6% YoY to US$1688/tonne while

the premium (MJP) was down ~21% YoY to US$95/tonne. The rupee

during the year depreciated ~2% to | 67.1/US$

Copper Segment

Total cathode production during the quarter was at 111 KT, up 19%

YoY. For full year FY17, cathode production was at 376 KT, down 3%

YoY

The CC rods production during the quarter was at 38 KT, down 3%

YoY. For FY17, the same was down 5% to 150 KT

DAP production during Q4FY17 was at 62 KT, down 10% YoY. For the

full year, the same was at 301 KT, down 7% YoY

Cathode and DAP production during the year was primarily impacted

by planned shutdown while CC rod production was lower on account

of subdued demand in the domestic market

Revenues from the copper segment reported a healthy increased

both for Q4FY17 as well as for FY17. The revenues for the quarter

were up 48% YoY to | 6202 crore while for FY17 the same was at

| 19408 crore. The healthy revenue increase is attributable to higher

overall realisations. For Q4FY17, the copper segment reported an

EBITDA of | 497 crore, up 29% YoY. For full year FY17, copper

EBITDA was marginally down ~1% YoY to | 1456 crore

Mine disruption in Chile and export ban from Indonesia impacted the

concentrate supply in H2FY17 thereby impacting the Tc/Rc

ICICI Securities Ltd | Retail Equity Research Page 6

Others

The company raised US$500 million though qualified institutional

placement (QIP). The proceeds from the QIP were largely used in

prepaying debt

The company continues to focus on deleveraging the balance sheet;

the company during the full year FY17 prepaid | 1031 crore of debt. In

April 2017 the company further repaid | 4505 crore. The total

repayments till date were at | 5536 crore. This is likely to result in

reduction in interest costs

The company during the year refinanced US$4.3 billion long term

debt of Novelis, which resulted cash interest reduction of US$79

million

The coal security during the year improved to two-third of the annual

coal requirement for the aluminium business enabling an adequate

visibility on the power cost to the company. The Gare Palma IV/4 and

IV/5 coal mines reached their peak capacity; the Kauthautia mines

also commenced operations useful for the Mahaan smelter

Over a medium term horizon, the management aims to double the

value added aluminium capacity from 300 KT currently to 600 KT

For Indian operations, the management maintained the capex

guidance for FY18 @ | 1000 crore

The company is looking at repayment of | 2200 crore of debt in the

balance part of FY18 broadly through internal accruals

The company exported ~40-50% of its domestic production during

FY17; going forward the company intends to sell more domestically

Hindalco’s hedging strategy of the company remains defensive and

not speculative. Normally 30-40% of volumes on an annual basis is

the hedged proportion, which company does not want to exceed.

However, on a quarterly basis, this may increase to 50%

For India operations, including Utkal, gross debt was | 32000 crore

with | 13000 crore of treasury as of FY17. At Novelis, gross debt was

US$4.9 billion while available treasury was US$600 million as of FY17

ICICI Securities Ltd | Retail Equity Research Page 7

Conference call highlights (Novelis)

FY17 Highlights

The net income increased to US$45 million from net loss of US$38

million year ago

o Excluding tax-effected special items in both years, net income

increased 78% from US$131 million to US$233 million

The adjusted EBITDA (excl. metal price lag) up 13% YoY to US$1085

million

o Metal price lag impact in FY17 minimised to negative US$31

million compared to negative US$172 million in FY16

The FRP shipments during the year were down 2% to 3067 kilo tonne

o Automotive shipments during the year increased to 18% of

total shipments from that of 15% in the previous year

o The sales during FY17 down 3% to US$9.6 billion

The free cash flow during the year increased to US$361 from US$160

million in FY16

o The FCF increase was driven by higher adjusted EBITDA,

completion of strategic capex, refinancing driven interest

savings, partly offset by higher working capital due to rising

aluminium prices

The net debt to EBITDA ratio now below 4x one year earlier than

anticipated

Q4FY17 Highlights

The net income increased to US$47 million from that of US$29 million

in the corresponding quarter of the previous year

The adjusted EBITDA during the quarter came in at US$292 million up

5% YoY

o The metal price lag impact was negligible as local market

premium volatility reduced

The sales during the quarter was up 9% YoY to US$2.6 billion

The FRP shipments during the quarter stood at 789 kilo tonne up 1 KT

YoY

o The automotive shipments during the quarter were up 26%

YoY

o During Q4FY17, the company achieved auto shipments exit

rate of 20% of shipments

Liquidity position during the quarter stood at US$1.3 billion

Other Highlights

Novelis has entered into a joint venture with Kobe Steel. The JV will

be named Ulsan Aluminium and will be formed by Novelis selling

50% of its ownership stake in Ulsan facility in South Korea to Kobe for

US$315 million. The transaction related to the JV is expected to be

completed by September 2017 subject to customary closing

conditions

o The cash from the Ulsan transaction to further deleverage

balance sheet for the time being, the management continues

to evaluate opportunities to deploy the same

ICICI Securities Ltd | Retail Equity Research Page 8

The management has guided an overall/aggregate EBITDA/tonne

guidance of US$350-360/tonne for FY18

The management indicated the Free Cash Flow (FCF) generation to be

at or above FY17 level for FY18.

The management said there has been no discussion on dividend part

with the parent as such, and that the focus remains on strengthening

the balance sheet and deleveraging. The management is looking for

right opportunities to deploy the FCF

The management indicated that post refinancing the debt repayment

now stands in the year 2022, and that there are no debt repayment

plans in the near term

The company during the year benefited from hedges to the tune of

~US$50 million

The FRP shipments in FY18 are expected to be higher compared to

FY17 and will be driven by higher mix of auto volumes

The capex run rate for FY18 and FY19 is around ~US$250 million

The reduction in interest cost for FY18 and FY19 to be ~US$245-250

million (cash interest)

ICICI Securities Ltd | Retail Equity Research Page 9

Outlook and valuation

Hindalco continued to deliver a steady performance in Q4FY17, marked

by higher volumes and realisations from both aluminium and copper

segment. Further, a strong performance of Novelis driven by increased

automotive shipments remained a highlight for the quarter and year. We

have valued Hindalco on an SOTP basis, thereby arriving at a target price

of | 225. We have upgraded the stock from HOLD to BUY

recommendation. The deleveraging of the balance sheet coupled with

low capex augurs well for the company.

Exhibit 7 : Valuation matrix

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE

(| cr) (%) (|) (%) (x) (x) (%) (%)

FY15 104281.1 18.9 4.1 -60.7 9.3 10.8 2.2 5.0

FY16E 100053.8 -4.1 1.3 -69.2 159.2 11.1 0.7 4.3

FY17E 100183.8 0.1 9.1 614.6 22.3 7.6 4.1 6.9

FY18E 118473.8 18.3 19.7 115.7 10.3 6.8 8.1 7.4

FY19E 128194.0 8.2 23.5 19.4 8.5 5.7 9.5 8.6

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

Recommendation history vs. consensus estimate

0.0

10.0

20.0

30.0

40.0

50.0

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70.0

80.0

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300

May-17Mar-17Jan-17Oct-16Aug-16May-16Mar-16Dec-15Oct-15Aug-15May-15

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events

Date/Year Event

2004 Copper smelter expansion, capacity raised to 250000 TPA

2005 MoUs signed with state governments of Odisha and Jharkhand to set up greenfield alumina refining, smelting and power plants; commissioned copper III expansion,

taking total capacity of copper smelter to 500000 TPA

2006 Comes out with a right issue amounting to | 2226.6 crore; enters into JV with Essar Power (MP) to develop and operate coal mines in Mahan, Madhya Pradesh;

company splits shares in ratio of 1:10

2007 In May 2007, Novelis becomes a Hindalco subsidiary with the completion of acquisition process. The transaction makes Hindalco the world's largest aluminium

rolling company and one of the largest producers of primary aluminium in Asia; acquisition of Alcan's 45% stake in Utkal Alumina project makes Hindalco the 100%

project owner

2008 Comes out with rights issue: raises | 4426 crore for re-financing bridge loan taken for Novelis acquisition; Hindalco Alex Aerospace (HAAL) facility becomes

operational and produces largest aluminium billet of 42 inch diameter

2009 Raises US$600 million through QIP route for projects

2011 Refinances Novelis debt amounting to US$4 billion; achieves financial closure of two projects through debt financing -Utkal Alumina for | 4906 crore and Mahan

Aluminium for | 7875 crore

2013 Promoter infuses capital into the company by way of conversion of warrants (@| 143/share), of total | 2150 crore

2015 Utkal Alumina International Limited (100% subsidairy) made a total investment over |7500 crore in its Alumina plant at Rayagada, Odisha having capacity of 1.5

million tonne per annum (MTPA)

2016 Hindalco may have to halt mining at its biggest bauxite reserve at Baphlimali mine, as the part of the land was recently deemed forest requiring the company to

obtain new permit latest by March 9 this year

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position Change

1 Aditya Birla Group 31-Mar-2017 30.5 684.3M 0

2 LIC Mutual Fund Asset Management Company Ltd. 31-Mar-2017 9.2 205.5M -30.7M

3 Birla Sun Life Asset Management Company Ltd. 30-Apr-2017 1.7 39.1M -0.7M

4 BlackRock Institutional Trust Company, N.A. 30-Apr-2017 1.5 33.8M 3.0M

5 Bajaj Allianz Life Insurance Company Limited 31-Mar-2017 1.4 31.4M 4.8M

6 Dimensional Fund Advisors, L.P. 31-Mar-2017 1.4 31.3M 0

7 Umang Commercial Co., Ltd. 31-Mar-2017 1.2 27.3M 0

8 The Vanguard Group, Inc. 31-Mar-2017 1.1 25.7M 0.1M

9 ICICI Prudential Asset Management Co. Ltd. 30-Apr-2017 1.0 21.6M 0.1M

10 Birla Institute of Technology & Science 31-Mar-2017 1.0 21.6M 0

Source: Reuters, ICICIdirect.com Research

(in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Promoter 37.7 37.7 37.7 37.7 34.7

FII 19.5 22.3 25.4 25.5 27.5

DII 19.0 17.7 15.8 15.9 17.8

Others 23.8 22.3 21.1 20.9 20.0

Recent Activity

Investor name Value Shares Investor name Value Shares

FIL Investment Management (Hong Kong) Limited 25.2M 8.4M LIC Mutual Fund Asset Management Company Ltd. -92.2M -30.7M

Bajaj Allianz Life Insurance Company Limited 14.4M 4.8M HDFC Asset Management Co., Ltd. -21.0M -6.8M

Franklin Templeton Asset Management (India) Pvt. Ltd. 14.3M 4.6M Norges Bank Investment Management (NBIM) -10.8M -4.7M

Lyxor Asset Management 13.3M 4.3M L&T Investment Management Limited -2.8M -1.0M

FIL Investment Management (Singapore) Ltd. 8.7M 3.1M Old Mutual Global Investors (UK) Limited -2.6M -0.9M

Buys Sells

Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

Financial summary (Cons.)

Profit and loss statement | Crore

(Year-end March) FY16 FY17 P FY18E FY19E

Net Sales 100053.8 100183.8 118473.8 128194.0

Other Operating Income 0.0 0.0 0.0 0.0

Total Operating Income 100053.8 100183.8 118473.8 128194.0

Growth (%) -4.1 0.1 18.3 8.2

Total Operating Expenditure 91329.8 87747.9 105148.5 113546.7

EBITDA 8724.0 12435.9 13325.4 14647.3

Growth (%) -2.5 42.5 7.2 9.9

Depreciation 4196.1 4457.2 4878.5 4938.5

Interest 5046.7 5742.4 4103.7 4046.3

Other Income 1211.3 1111.0 948.0 1185.0

Exceptional Item 171.1 32.8 0.0 0.0

PBT 521.4 3314.4 5291.2 6847.5

Total Tax 514.8 1432.6 1322.8 1711.9

PAT 6.6 1881.8 3968.4 5135.6

Growth (%) -92.2 NM 110.9 29.4

Minorities, Associates etc 256.7 0.0 90.1 90.1

Rep PAT after Assoc., MI 263.3 1881.8 4058.5 5225.7

Adj PAT after Assoc., MI 434.4 1881.8 4058.5 5225.7

Growth (%) -84.5 333.2 115.7 28.8

Adj EPS (|) 1.3 8.4 18.2 23.5s

Source: Company, ICICIdirect.com Research

Cash flow statement | Crore

(Year-end March) FY16 FY17 P FY18E FY19E

Profit after Tax 263.3 1881.8 4058.5 5225.7

Add: Depreciation 4196.1 4457.2 4878.5 4938.5

Add: Interest 5046.7 5742.4 4103.7 4046.3

(Inc)/dec in Current Assets 2595.4 590.0 -8707.6 -4394.2

Inc/(dec) in CL and Prov. -1513.6 -3619.6 4909.6 5068.3

CF from operating activities 10588.0 9051.9 9242.7 14884.6

(Inc)/dec in Investments -1977.5 -833.6 150.0 150.0

(Inc)/dec in Fixed Assets -3420.1 -5663.9 -1000.1 -3000.0

Others -1416.4 -724.9 -315.7 -209.9

CF from investing activities -6814.1 -7222.4 -1165.7 -3059.9

Issue/(Buy back) of Equity 0.0 16.2 0.0 0.0

Inc/(dec) in loan funds 10.6 2542.1 -4500.0 -6500.0

Interest Paid -5046.7 -5742.4 -4103.7 -4046.3

Dividend paid & dividend tax -241.6 -241.6 -241.6 -241.6

Inc/(dec) in Share Cap 289.6 5762.6 0.0 0.0

Others 0.0 0.0 0.0 0.0

CF from financing activities -4988.1 2336.9 -8845.3 -10787.9

Net Cash flow -1214.2 4166.4 -768.3 1036.8

Opening Cash 5308.9 4094.8 8261.2 7492.9

Closing Cash 4094.8 8261.2 7492.9 8529.7

Source: Company, ICICIdirect.com Research

Balance sheet | Crore

(Year-end March) FY16 FY17 P FY18E FY19E

Liabilities

Equity Share Capital 206.5 222.7 222.7 222.7

Reserve and Surplus 38433.3 45836.1 49653.0 54637.2

Total Shareholders funds 38639.8 46058.8 49875.7 54859.9

Total Debt 67068.7 69610.8 65110.8 58610.8

Deferred Tax Liability 3330.3 2866.6 2866.6 2866.6

Minority Interest & Others 1409.6 1074.5 984.4 894.3

Total Liabilities 110448.5 119610.7 118837.5 117231.6

Assets

Gross Block 109297.9 121708.0 121961.9 123461.9

Less: Acc Depreciation 32564.0 37021.2 41899.7 46838.2

Net Block 76733.9 84686.8 80062.2 76623.7

CWIP 8560.1 1813.9 2560.1 4060.1

Investments 14323.9 15157.5 15007.5 14857.5

Inventory 16794.0 18291.4 21098.1 22829.1

Debtors 8199.5 8274.8 10386.7 10536.5

Loans and Advances 6350.0 3240.8 8530.1 10588.8

Other Current Assets 3752.6 4699.2 3198.8 3653.5

Cash 4094.8 8261.2 7492.9 8529.7

Total Current Assets 39190.9 42767.3 50706.6 56137.6

Current Liabilities 21306.4 21256.9 22721.0 26341.2

Provisions 9213.0 5642.9 9088.4 10536.5

Current Liabilities & Prov 30519.3 26899.8 31809.4 36877.7

Net Current Assets 8671.6 15867.5 18897.2 19259.9

others 2159.0 2085.1 2310.6 2430.4

Application of Funds 110448.5 119610.7 118837.5 117231.6

Source: Company, ICICIdirect.com Research

Key ratios

(Year-end March) FY16 FY17 P FY18E FY19E

Per share data (|)

Reported EPS 1.3 8.4 18.2 23.5

Cash EPS 22.4 28.5 40.1 45.6

BV 187.1 206.8 223.9 246.3

DPS 1.0 1.0 1.0 1.0

Cash Per Share 19.8 37.1 33.6 38.3

Operating Ratios (%)

EBITDA Margin 8.7 12.4 11.2 11.4

PBT / Total Operating income 0.5 3.3 4.5 5.3

Adj PAT Margin 0.4 1.9 3.4 4.1

Inventory days 61 67 65 65

Debtor days 30 30 32 30

Creditor days 78 77 70 75

Return Ratios (%)

Adj RoE 0.7 4.1 8.1 9.5

Adj RoCE 4.3 6.9 7.4 8.6

RoIC 5.0 7.9 8.4 8.9

Valuation Ratios (x)

P/E 156.8 23.7 11.0 8.5

EV / EBITDA 11.1 7.6 6.8 5.7

EV / Net Sales 1.0 0.9 0.8 0.7

Market Cap / Sales 0.4 0.4 0.4 0.3

Price to Book Value 1.1 1.0 0.9 0.8

Solvency Ratios

Net Debt/EBITDA 5.6 3.7 3.2 2.4

Debt / Equity 1.7 1.5 1.3 1.1

Current Ratio 1.3 1.6 1.6 1.5

Quick Ratio 0.7 0.9 0.9 0.9

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12

ICICIdirect.com coverage universe (Metals & Mining)

CMP M Cap

(|) TP (|) Rating (| Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

Coal India 268 365 Buy 166172 16.1 19.6 22.4 18.6 15.3 13.4 9.8 8.0 6.6 36.9 51.5 62.1 36.1 48.6 56.3

Hindalco 200 225 Hold 44540 8.4 18.2 23.5 23.7 11.0 8.5 7.6 6.8 5.7 6.9 7.4 8.6 4.1 8.1 9.5

Hindustan Zinc 243 300 Buy 102773 19.7 23.9 25.5 13.8 11.3 10.6 9.3 7.3 6.1 26.9 33.2 30.3 27.0 27.0 24.3

JSW Steel 190 215 Buy 45927 14.3 18.8 20.8 13.5 10.2 9.3 7.2 6.7 6.3 13.3 14.5 14.5 15.3 17.4 16.4

SAIL 58 60 Hold 24101 -5.9 -0.6 6.2 NA NA 10.1 62.6 13.6 6.6 -2.0 2.1 7.0 -6.5 -0.7 7.3

Vedanta 242 260 Hold 71753 15.1 30.5 34.4 9.3 16.3 15.9 4.8 4.1 3.6 12.1 14.2 14.8 9.3 16.3 15.9

Tata Steel 484 550 Buy 143506 42.2 47.0 64.2 11.5 10.3 7.5 7.4 7.2 6.0 9.4 9.4 11.1 10.8 13.8 16.2

ROE(%)ROCE(%)

Company

EV/EBITDA (x)EPS (|) P/E (x)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 13

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

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Mumbai – 400 093

[email protected]

ICICI Securities Ltd | Retail Equity Research Page 14

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