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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