We are turning cautious on Novelis as demand for Aluminium (AI) rolled products slows down considerably in North America and Europe.
Industry leader Alcoa reported a 20% decline in rolled product sales for December 2008 and is projecting a 2% decline in global Al demand in 2009 with demand in US and Europe declining by 9%-12%.
These regions account for about 70% of Novelis’s deliveries. We now expect Novelis will report a minor loss in 2009 due to lower volume and profit margin.
We are modeling a 20% volume decline in H2FY09 and a 7% decline in FY10. Weak demand will also negatively affect profit margin and we expect a 25% decline in EBITDA/tonne in 2009.
Globally, a 9% cut in Al production has been announced. Al price hit bottom in December 2008 and we project Al price to move up $1,700-1,800/tonne in the near term.
We lowered our FY10 Al price estimates to $1,950/tonne in line with Global BNP Paribas metal price estimates.
Hindalco (India) stands to benefit from a price decline of 10%-40% for key raw materials such as lime, coke, pitch and fuel oil in 2HFY09.
The decline in raw material prices and weak rupee more than offset the lower Al price estimate, and we expect standalone operations to report better FY10 EPS than our prior expectation.
We continue to value Hindalco standalone and Novelis operations at 5.0x FY10E EV/EBITDA.
We have cut our target price by 38% to Rs42 on lower operating performance. Our TP has also been affected by production shutdown at copper mines in Australia due to weak copper price.
FY09E estimates have also been revised to Rs4.46 and FY10E EPS to Rs4.39. Our revised target price implies a price to tangible book value of 1.0x.