Hindalco- Another strong quarter for Novelis : Kotak Sec

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Hindalco Industries (HNDL)
Metals
Another strong quarter for Novelis, raise estimates and TP. Novelis reported an
excellent all-round performance with shipment of 767 kt (+5.9% yoy), adjusted EBITDA
of US$290 mn (+45% yoy) and adjusted PBT of US$137 mn (+174% yoy). EBITDA
growth was contributed by further increase in conversion premium, volume growth,
cost management and gain on metal price lag. We incorporate revised aluminium price
forecast for FY2011-13E, marginally raise our EPS estimates and raise our end-FY2012E
target price to Rs255 (Rs225 earlier). Maintain ADD rating.





Excellent quarter—adjusted EBITDA grows 45% yoy to US$290mn, EBITDA/ ton to US$378
Novelis’ adjusted EBITDA growth was led by (1) 5.9% yoy growth in shipments to 767 kt; (2)
increase in conversion premium and shift of business mix to premium products; this helped yoy
EBITDA improve by US$40/ ton and (3) gain from metal price lag—this benefited EBITDA by US$28
mn yoy. Gains/ losses from metal price lag are on account of timing differences on pass-through of
changing aluminium prices from suppliers to the customer or for timing differences between the
flow of metal costs through moving average inventory cost values and cost of goods sold.
EBITDA/ ton increased further to US$378, up 12% qoq and 37% yoy. Even after removal of metal
price lag gain of US$36/ ton, performance is impressive, in our view. Novelis reported GAAP net
income of US$62 mn. Adjusted PBT grew 174% yoy to US$137 mn.

Capacity expansion at marginal cost; guides for strong free cash generation
Novelis reiterated US$1 bn + adjusted EBITDA target for FY2011E (US$553 mn delivered in 1H)
and strong FCF generation of US$355 mn+ on an adjusted basis; on reported basis, FCF may be
US$277 mn in our view. Strong FCF guidance is maintained even after US$250 mn capex program
for FY2011E. More important, the company has guided for 600 ktpa expansion of flat rolled
capacity by FY2014 at minimal capex which can be significantly value accretive. Out of the 600
ktpa expansion, 220 ktpa will be from expansion of Pinda facility in Brazil and the balance through
annual debottlenecking that can yield incremental 3-4% capacity every year till FY2014E.

Raise estimate on high aluminium price and Novelis performance, TP raised to Rs255
We increase our aluminium price assumption by 5.1%, 4.9% and 4.5% to US$2,050, US$2,150
and US$2,300 for FY2011E, FY2012E and FY2013E. We also raise our Novelis FY2011E, FY2012E
and FY2013E EBITDA estimates by 1%, 4.9% and 7.5% to US$994 mn, US$1,073 mn and
US$1,079 mn. This drives a 3-3.2% upward revision in our EPS estimate for FY2011-13E. We raise
our end-FY2012E TP to Rs255 from Rs225 earlier; on account of higher estimates and assigning
full value to CWIP versus 0.75X earlier. Maintain ADD rating. Hindalco is an ideal mix of steadycash
flow generating business (Novelis) that can potentially fund value-accretive new Greenfield
projects.