4QFY2012 Result Update | Base Metals

May 8, 2012

Hindalco
Performance highlights

NEUTRAL
CMP Target Price
4QFY11 % chg (yoy) 6,761 914 13.5 708 11.9 (5.4) (209)bp (9.7) 3QFY12 % chg (qoq) 6,590 716 14.5 452 14.8 20.8 (308)bp 41.7

`117 -

Particulars (` cr) Net sales EBITDA % margin Adjusted net profit

4QFY12 7,563 865 11.4 640

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Base Metals 22,477 1.4 208/111 1,313,883 1 16,546 5,000 HALC.BO HNDL@IN

Source: Company, Angel Research

For 4QFY2012, Hindalcos standalone net sales and profits were above our estimates. However, we recommend Neutral on the stock. Aluminium segment drags standalone profits: Hindalcos standalone net sales increased by 11.9% yoy to `7,563cr mainly on account of higher aluminium sales volumes. However, aluminium segment EBIT decreased by 14.0% yoy to `484cr due to increase in input costs and lower realizations. Nevertheless, copper segment EBIT rose by 42.5% yoy to `293cr due to higher production, higher treatment and refining charges and improved efficiencies. Overall, Hindalcos EBITDA decreased by 5.4% yoy to `865cr and net profit decreased by 9.7% yoy to `640cr. Hindalco issues warrants and raises debt to fund projects: During 4QFY2012, Hindalco allotted 15cr warrants to promoters at a price of `144.35. The company also issued non-convertible debentures of `3,000cr during April 2012. The proceeds would be utilized mainly to fund its expansion projects in our view. Outlook and valuation: Although Hindalco is expanding its capacities three-fold over the coming four-five years, low aluminium prices, rising costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth in the medium-term. In the near-term, there is lack of clarity over production from Mahan coal block for its upcoming Mahan smelter. Without captive coal block, the Mahan smelter (expected to commission in 1QFY2013) is expected to face cost pressures, resulting in lower return ratios over the next two years. Moreover, we do not rule out delays in upcoming projects. Hence, we recommend Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 32.1 14.9 35.1 18.0

Abs. (%) Sensex Hindalco

3m

1yr

3yr 39.3 71.9

(6.6) (10.7) (24.3) (42.2)

Key financials (Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011 71,801 18.6 2,456 (37.4) 12.8 11.1 9.1 0.8 9.7 9.2 0.5 4.6

FY2012E 79,304 10.5 3,385 37.8 17.7 9.9 6.6 0.7 11.1 7.6 0.5 4.8

FY2013E 84,401 6.4 3,249 (4.0) 17.0 9.6 6.9 0.6 9.7 6.8 0.5 5.1

FY2014E 88,510 4.9 3,611 11.1 18.9 10.5 6.2 0.6 9.8 7.2 0.5 4.8

Bhavesh Chauhan
Tel: 022- 3935 7800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 vinay.rachh@angelbroking.com

Please refer to important disclosures at the end of this report

Hindalco | 4QFY2012 Result Update

Exhibit 1: 4QFY2012 performance (Standalone)

(` cr) Net sales Raw material % of net sales Power and fuel % of net sales Staff cost % of net sales Other expenses % of net sales Total expenditure % of net sales Operating Income EBITDA % of net sales Interest Depreciation Other income Exceptional Items PBT % of net sales Provision for tax % of PBT PAT
Source: Company, Angel Research

4QFY12 7,563 5,316 70.3 744 9.8 268 3.5 454 6.0 6,782 89.7 84 865 11.4 80 166 161 0 779 10.3 139 17.9 640

4QFY11 6,761 4,675 69.1 587 8.7 281 4.2 389 5.8 5,932 87.7 86 914 13.5 56 176 105 0 787 11.6 79 10.0 708

yoy % 11.9 13.7 26.9 (4.8) 16.8 14.3 58.3 (5.4) 42.0 (5.8) 52.7 (1.0) 76.8 (9.7)

3QFY12 6,590 4,397 66.7 738 11.2 304 4.6 493 7.5 5,932 90.0 57 716 10.9 79 175 90 0 552 8.4 100 18.2 452

qoq % 14.8 20.9 0.8 (11.9) (7.8) 14.3 47.6 20.8 0.9 (5.1) 78.2 41.3 39.1 41.7

Exhibit 2: Standalone 4QFY2012 Actual vs. Angel estimates

(` cr) Net sales EBITDA EBITDA margin (%) Adj. net income
Source: Company, Angel Research

Actual 7,563 865 11.4 640

Estimate 6,680 793 11.9 516

Variation (%) 13.2 9.0 (44)bp 24.0

May 8, 2012

Hindalco | 4QFY2012 Result Update

Hindalco (Standalone) Key result highlights

Hindalcos standalone net sales increased by 11.9% yoy to `7,563cr (above our estimate of `6,680cr) mainly on account of higher aluminium sales volumes. However, aluminium segment EBIT decreased by 14.0% yoy to `484cr due to decrease in realizations coupled with increase in input costs (mainly coal and crude derivatives). Nevertheless, copper segment EBIT rose by 42.5% yoy to `293cr due to higher production, higher treatment and refining charges and improved efficiencies. Overall, Hindalcos EBITDA decreased by 5.4% yoy to `865cr and EBITDA margin slipped 209bp yoy to 11.4% during 4QFY2012. Interest expenses grew by 42.0% yoy to `80cr while other income came in ahead of our expectations and grew by 52.7% yoy to `161cr. Consequently, net profit decreased by only 9.7% yoy to `640cr (above our estimate of `516cr).

Segmental performance
Copper cathode and CC rods production grew by 11.8% and 20.9% yoy to 95k and 40k, respectively.

Exhibit 3: Copper Quarterly production trend

(tonnes) Copper cathodes CC rods* 4QFY11 1QFY12 2QFY12 84,961 73,192 74,588 33,088 33,701 33,972 3QFY12 87,748 38,426 4QFY12 95,000 40,000 yoy % 11.8 20.9 qoq % 8.3 4.1

Source: Company, Angel Research; Note: *Own production

In aluminium segment alumina, aluminium, downstream products production increased by 0.3%, 3.8%, 12.0% yoy to 345k, 144k, and 64k, respectively.

Exhibit 4: Aluminium Quarterly production trend

(tonnes) Alumina Aluminium metal 4QFY11 344,077 138,720 1QFY12 334,587 140,387 2QFY12 332,383 143,315 3QFY12 343,086 146,374 4QFY12 345,000 144,000 yoy % qoq % 0.3 3.8 0.6 (1.6)

Source: Company, Angel Research

May 8, 2012

Hindalco | 4QFY2012 Result Update

Exhibit 5: Segmental performance

(` cr) Aluminium Copper Gross revenue Less: Inter-seg. revenue Net sales Aluminium Copper EBIT EBIT margin (%) Aluminium Copper
Source: Company, Angel Research

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 2,211 4,637 6,848 (2) 6,846 562 206 768 25.4 4.4 2,093 3,940 6,033 (2) 6,031 599 145 744 28.6 3.7 2,213 4,062 6,275 (3) 6,272 429 148 576 19.4 3.6 2,236 4,418 6,654 (7) 6,647 310 216 526 13.9 4.9 2,499 5,154 7,653 (6) 7,647 484 293 777 19.4 5.7

yoy % qoq % 13.0 11.2 11.8 11.7 (14.0) 42.5 1.2 11.7 16.7 15.0 15.0 56.1 35.8 47.8 -

Aluminium segment EBIT decreased by 14.0% yoy to `484cr due to decrease in realizations coupled with increase in input costs (mainly coal and crude derivatives). Aluminium segments EBIT margin stood at 19.4% in 4QFY2012 compared to 25.4% in 4QFY2011. Copper segment EBIT rose by 42.5% yoy to `293cr due to higher production, higher treatment and refining charges and improved efficiencies. Copper segments EBIT margin stood at 5.7% in 4QFY2012 compared to 4.4% in 4QFY2011.

May 8, 2012

Hindalco | 4QFY2012 Result Update

Investment rationale
Aluminium capacity to increase three folds in the next four years
Hindalco aims to increase its aluminium capacity by almost three-folds in the next four years to 1.5mn tonnes. Consequently, we expect production and sales volume to record significant growth over FY201114. Most of these new capacities will be backed by captive bauxite and coal mines; however, there is lack of clarity on production from Mahan coal block on account of environmental issues currently.

Exhibit 6: Smelting capacity to scale up gradually

1,800 1,600 1,400 1,200 1,000 359 359 359 1680

Exhibit 7: Refining capacity to grow 3.0x

5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1500 1500 3000 4500

(ktpa)

800 600 400 200 0 390

213

(ktpa)
Mahan Aditya Jharkhand Total

Renukhoot Hirakood

0 Existing Utkal Aditya Total

Source: Company, Angel Research

Source: Company, Angel Research

Novelis to expand its capacity

Novelis has plans to increase its capacity by ~20% by FY2014E. Capacity at its Pinda operations in Brazil is being increased by ~220kt by CY2012, while the balance will be through debottlenecking (a 3-4% increase in capacity every year). Further, Novelis plans to invest US$400mn to expand its South Korean aluminum rolling and recycling operations by 1mtpa. We expect steady EBITDA of ~US$1bn per year from Novelis, given its stable conversion business.

Exhibit 8: Novelis to generate US$1bn annually

1,150 1,100 1,050 14 12 10

(US $ mn)

950 900 850 800 FY10 FY11 EBITDA FY12E FY13E EBITDA margin FY14E

6 4 2 0

Source: Company, Angel Research

May 8, 2012

(%)

1,000

Hindalco | 4QFY2012 Result Update

Returns on new projects under threat

Given the uncertainty on production from Mahan coal block and subdued outlook on aluminium prices in the near-term, we expect lower return on capital employed from upcoming Mahan smelter over the next couple of years. Our analysis points out that return on equity on the upcoming 3-fold capacity could be over 11% only in case aluminium prices are over US$2,300 alongside production from captive coal mines for all three upcoming smelters.

Outlook and valuation

Although Hindalco is expanding its capacities three-fold over the coming four-five years, low aluminium prices, rising costs and delay in commencement of mining from captive blocks are expected to mute its profitability growth. In the near-term, there is lack of clarity over production from Mahan coal block for its upcoming Mahan smelter. Without captive coal block, Mahan smelter (expected to commission in 1QFY2013) is expected to face cost pressures, resulting in lower return ratios over the next two years. Moreover, we do not rule out delays in upcoming projects. Hence, we recommend Neutral on the stock.

Exhibit 9: SOTP valuation

FY2014 EBITDA (` cr) Hindalco (Standalone) Novelis Total EV Less: Net debt (FY14E) Value of investments @25% discount Value per share
Source: Angel Research

Multiple 5.0 4.0

EV (` cr) 20,076 21,006 41,082 21,895 2,760 115

4,015 5,251

Exhibit 10: EPS - Angel forecast vs. consensus

Year (`) FY13E FY14E
Source: Bloomberg, Angel Research

Angel forecast
17.0 18.9

Bloomberg consensus
16.4 18.1

Variation (%) 3.5 4.2

May 8, 2012

Hindalco | 4QFY2012 Result Update

Exhibit 11: EV/EBITDA band

160,000 140,000 120,000 100,000

(`cr)

80,000 60,000 40,000 20,000 0 Apr-07Oct-07 Apr-08Oct-08 Apr-09Oct-09 Apr-10Oct-10 Apr-11Oct-11 Apr-12 2x 5x 8x 11x 14x

Source: Bloomberg, Angel Research

Exhibit 12: P/E band

1,000 900 800 700 600 500 400 300 200 100 0 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 5x
Source: Bloomberg, Angel Research

(`)

15x

25x

35x

Exhibit 13: P/BV band

350 300 250
(`)

200 150 100 50 0 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 0.2x 0.7x 1.2x 1.7x

Source: Bloomberg, Angel Research

May 8, 2012

Hindalco | 4QFY2012 Result Update

Exhibit 14: Recommendation summary

Companies CMP Target price (`) Hindalco Nalco Sterlite Hind. Zinc 117 59 99 122 (`) Reco. Mcap Upside (` cr) (%) (12) 24 13 P/E (x) FY13E 6.9 23.2 14.8 8.2 FY14E 6.2 16.8 10.4 7.4 P/BV (x) FY13E 0.6 1.3 0.7 1.6 FY14E 0.6 1.2 0.7 1.4 EV/EBITDA (x) FY13E 5.1 10.8 8.6 4.3 FY14E 4.8 8.3 6.0 3.1 RoE (%) FY13E 9.7 5.6 4.8 21.2 FY14E 9.8 7.4 6.5 19.9 RoCE (%) FY13E 6.8 3.2 2.3 20.5 FY14E 7.2 5.6 4.1 19.5

- Neutral 22,477 51 Reduce 15,128 122 Buy 33,270 139 Accum. 51,591

Source: Company, Angel Research

May 8, 2012

Hindalco | 4QFY2012 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr) Net sales Other operating income Total operating income % chg Total expenditure EBITDA % chg (% of Net sales) Depreciation EBIT % chg (% of Net sales) Interest charges Other income (% of PBT) Share in profit of asso. Recurring PBT % chg Extra. Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Earnings of asso. Less: Minority interest Extra. Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 65,415 211 65,625 9.4 62,648 2,977 (55.1) 4.6 3,038 (60) (0.1) 1,232 688 (113.7) (605) (605) (954) 349 (35) 172 485 422 (82.0) 0.6 2.8 2.5 (87.0) FY2010 60,563 160 60,722 (7.5) 50,976 9,746 227.3 16.1 2,784 6,962 11.5 1,104 323 5.2 6,181 6,181 1,829 29.6 4,352 (3) (424) 3,925 3,910 826.2 6.4 22.1 20.4 723.0 FY2011 FY2012E FY2013E FY2014E 71,801 277 72,078 18.7 64,076 8,002 (17.9) 11.1 2,750 5,252 (24.6) 7.3 1,839 431 11.2 3,843 (37.8) 3,843 964 25.1 2,879 (57) (366) 2,456 2,456 (37.2) 3.4 12.8 12.8 (37.2) 79,304 244 79,548 10.4 71,686 7,862 (1.7) 9.9 2,823 5,039 (4.0) 6.4 1,131 736 15.8 4,644 20.8 4,644 1,072 23.1 3,572 (187) 3,385 3,385 37.8 4.3 17.7 17.7 37.8 84,401 251 84,652 6.4 76,521 8,131 3.4 9.6 3,163 4,967 (1.4) 5.9 1,154 797 17.3 4,611 (0.7) 4,611 1,167 25.3 3,444 (195) 3,249 3,249 (4.0) 3.8 17.0 17.0 (4.0) 88,510 256 88,766 4.9 79,500 9,267 14.0 10.5 3,552 5,715 15.0 6.5 1,445 806 15.9 5,075 10.1 5,075 1,264 24.9 3,812 (201) 3,611 3,611 11.1 4.1 18.9 18.9 11.1

(120.3) (1,121.7)

May 8, 2012

Hindalco | 4QFY2012 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Share warrants Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. exp. not written off Total assets
38,332 10,807 27,525 2,949 4,291 10,431 19,271 2,192 1,827 15,252 16,260 3,011 0.4 48,207 41,189 16,622 24,567 5,801 4,433 11,246 23,188 2,195 3,117 17,876 18,017 5,172 51,219 39,265 15,801 23,464 13,131 8,941 10,855 27,985 2,556 3,333 22,095 21,684 6,301 62,692 47,265 18,625 28,641 12,430 8,941 10,855 27,347 4,851 1,586 20,909 18,719 8,628 69,496 57,265 21,788 35,477 11,730 8,941 10,855 28,681 4,702 1,688 22,291 19,513 9,167 76,171 67,265 25,340 41,925 11,030 8,941 10,855 30,465 5,442 1,770 23,253 20,003 10,462 83,214 170 15,684 15,854 1,287 28,310 2,757 48,207 191 21,353 21,545 1,737 23,999 3,938 51,219 191 28,832 29,024 2,217 27,692 3,760 62,692 191 31,949 32,140 2,404 31,192 3,760 69,496 191 34,929 35,121 2,599 34,692 3,760 76,171 191 38,272 38,463 2,799 38,192 3,760 83,214 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

May 8, 2012

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Hindalco | 4QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Others Direct taxes paid Cash flow from operations (Inc.)/ Dec. in fixed assets (Inc.)/ Dec. in investments (Inc.)/ Dec. in loans & adv. Others Cash flow from investing Issue of equity Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal.
FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E (605) 3,038 2,931 61 843 4,581 (2,890) 4,907 (910) 2,928 5,062 (9,195) 353 2,245 (6,731) 778 1,405 2,183 6,181 2,784 (598) (2,799) 635 4,932 (4,171) (1,614) (348) (5,437) 2,754 (321) 327 1,677 428 (76) 2,263 2,187 3,843 2,725 (703) 1,675 1,313 6,226 (7,717) 507 (519) (6,691) 10 3,738 384 2,539 825 361 2,186 2,547 4,644 2,823 (32) 1,072 6,363 (7,300) (7,300) 3,500 269 3,231 2,295 2,556 4,851 4,611 3,163 (688) 1,167 5,919 (9,300) (9,300) 3,500 269 3,231 (149) 4,851 4,702 5,075 3,552 (555) 1,264 6,809 (9,300) (9,300) 3,500 269 3,231 740 4,702 5,442

May 8, 2012

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Hindalco | 4QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book value DuPont analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of debt (post tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage
1.0 5.3 0.5 1.1 6.3 0.5 1.8 2.9 0.5 2.0 4.5 0.5 2.4 4.3 0.6 2.4 4.0 1.8 50 37 55 36 1.5 81 39 83 36 1.8 70 42 70 37 1.8 60 42 60 40 1.6 60 42 60 41 1.4 60 42 60 41 2.6 14.0 21.6 20.9 9.2 15.4 9.7 7.6 13.0 11.1 6.8 11.0 9.7 7.2 10.9 9.8 (0.1) 1.7 4.1 1.0 11.5 70.4 1.7 13.4 3.0 0.5 18.5 7.3 74.9 1.7 9.1 5.3 0.5 10.9 6.4 76.9 1.5 7.5 3.0 0.5 9.8 5.9 74.7 1.5 6.5 2.6 0.5 8.6 6.5 75.1 1.4 6.7 3.0 0.6 8.9 2.8 2.5 20.3 1.4 93.2 22.1 20.4 35.0 1.4 112.6 12.8 12.8 27.2 1.4 151.7 17.7 17.7 32.4 1.4 167.9 17.0 17.0 33.5 1.4 183.5 18.9 18.9 37.4 1.4 201.0 47.3 5.8 1.3 1.1 0.5 12.0 1.3 5.7 3.4 1.0 1.1 0.5 3.4 1.3 9.1 4.3 0.8 1.1 0.5 4.6 1.6 6.6 3.6 0.7 1.1 0.5 4.8 1.3 6.9 3.5 0.6 1.1 0.5 5.1 1.2 6.2 3.1 0.6 1.1 0.5 4.8 1.1 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

May 8, 2012

12

Hindalco | 4QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Hindalco No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 8, 2012

13