Hindalco – 2QFY2011 Result Update- Angel Broking

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   Hindalco – 2QFY2011 Result Update

Angel Broking recommends Accumulate on Hindalco with a Target Price of Rs249.

Higher costs led to margin compression in Indian operations: For 2QFY2011,

Hindalco’s standalone net revenue grew by 18.6% yoy and 12.8% qoq to

`5,803cr, aided by higher prices and better product mix, though production at

Hirakud was lower as operations were affected by heavy rains. EBITDA grew by

14.6% yoy to `698cr, while EBITDA margin remained flat yoy. However, margin

contracted by 414bp qoq to 12.0% due to 1) higher raw-material, power and fuel

costs 2) lower TC/RCs and 3) VRS payout of `22cr at Kalwa foil plant, which

resulted in a 16.1% qoq decline in EBITDA. Interest expense fell by 20.6% yoy

and 11.3% qoq to `53cr, while other income grew by 43.3% yoy and 19.1% qoq

to `82cr. Thus, net profit grew by 26.1% yoy to `434cr, down 18.8% qoq.

Further, the company’s cathode production in 3QFY2011 is likely to be affected

(loss of ~8,000 tonnes) by the recent breakdown of the cooling tower at Dahej.

Highest EBITDA/tonne for Novelis again: Novelis’ top line grew by 15.7% yoy to

US $2,524mn (flat qoq), as total shipments increased by 5.9% yoy to 767kt,

down 1.5% qoq. Novelis reported adj. EBITDA of US $290mn, up 45% yoy and

10.3% qoq largely due to portfolio optimisation, cost management and higher

pricing. Thus, adj. EBITDA/tonne touched its all-time high at US $378.

Management reiterated its guidance of adj. EBITDA to exceed US $1bn.

Outlook and valuation: At the CMP, the stock is trading at 7.3x FY2011E and

7.0x FY2012E EV/EBITDA. We believe Hindalco is well placed to benefit from

a) its aluminium expansion plans in India (capacity increasing by nearly two-three

folds in the next two-four years), b) low production cost at its new capacities and

c) capacity expansion at Novelis. We recommend Accumulate on the stock with a

revised SOTP Target Price of `249 (`204).

Key conference call takeaways

􀂄 Management indicated that shipments in Asia were affected during the

quarter, as there was a strike in Korea due to wage negotiation. In Europe, the

automotive sector witnessed robust demand; whereas, strong demand was

witnessed across segments in North America.

􀂄 The company proposes to close its high-cost operations at Bridgnorth plant,

which will reduce its annual operating cost by US $15mn. Further, it would

help the company in increasing the production of high value-added products

within Europe.

􀂄 The company plans to increase its capacity by ~20% by FY2014E. While

capacity at its Pinda operations in Brazil is being increased by ~220kt, the

balance will be through debottlenecking (nearly 3–4% increase in capacity

every year). Out of the US $300mn capex planned for Pinda expansion,

~25% and 40% will be incurred in FY2011E and FY2012E, respectively.

Further, management indicated that the capex for debottlenecking would be

less than US $80mn.

􀂄 Capex for 1HFY2011 stood at US $71mn. Management indicated that it

deferred its capex plans in 1HFY2011 to meet strong demand. Further,

management stated that it maintains the full year capex guidance of

US $250mn as the company will incur back-end capital spends.

􀂄 During the quarter, free cash flow was higher at US $97mn as compared to

US $34mn in 1QFY2011. Management expects free cash flow in FY2011E to

exceed US $355mn.

Investment rationale

Aluminium capacity to increase 2–3 folds in the next 2–4 years

Hindalco is increasing its aluminium capacity by two-three folds in the next

two-four years. Part of the Phase-1 at Hirakud has been completed, wherein the

capacity will increase to 161ktpa. Further, in Phase-2, capacity will increase to

213ktpa by 4QFY2012E. Moreover, capacities at Mahan Aluminium and Aditya

Aluminium are expected to come on stream by FY2012E. 

Consequently, we expect

sales volume to grow at a 20.8% CAGR over FY2010–13E. Further, the company’s

Jharkhand Aluminium project is expected to be commissioned in 1QFY2014.

On the alumina front, with the commissioning of the Utkal refinery in FY2012E, we

expect alumina sales volume to grow at a 37.3% CAGR over FY2010–12E.

Moreover, these new capacities are coming at the lower end of the cost curve and

will further benefit the company in terms of cost reduction.

Novelis to expand its capacity

Novelis plans to increase its capacity by ~20% by FY2014E. While capacity at its

Pinda operations in Brazil is being increased by ~220kt, the balance will be

through debottlenecking (nearly 3–4% increase in capacity every year). Out of the

US $300mn capex planned for Pinda expansion, ~25% and 40% will be incurred

in FY2011E and FY2012E, respectively. The capex for debottlenecking would be

less than US $80mn and will generate higher returns for the company.

Outlook and valuation

At the CMP, the stock is trading at 7.3x FY2011E and 7.0x FY2012E EV/EBITDA.

We believe Hindalco is well placed to benefit from a) its aluminium expansion

plans (capacity increasing by nearly two-three folds in the next two-four years),

b) low production cost at its new capacities and c) capacity expansion at Novelis.

We recommend Accumulate on the stock with a revised SOTP Target Price of `249

(`204).

For FY2011 and FY2012, we have revised our price estimates upwards, whereas

our volume estimates have been revised downwards, factoring risks associated

with the execution of the company’s expansion projects. The Utkal Alumina project

has achieved financial closure, whereas the Mahan Aluminium project is yet to

achieve the same. Further, we have increased our multiple for Novelis as the

business is highly insulated from the fluctuation in spot prices.