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EARNINGS REVIEW
Hindalco Industries (HALC.BO)
Neutral
Below expectations; margins compress despite higher realizations
What surprised us
Hindalco reported 2QFY11 stand-alone net income of Rs4,338mn (+26% yoy, -
19% qoq), 12% below our expectation and 14% below Bloomberg consensus.
While the top line at Rs58bn (+19% yoy, +13% qoq) was largely in line, higher
costs led to significant margin compression – EBITDA came in at Rs6,984mn
(+15% yoy, -16% qoq), implying 400 bps qoq margin compression. Key
highlights: Aluminium: Despite lower volumes (-12% yoy) due to power
outage at the Hirakud smelter, revenue growth at 16% was robust led by
improved product mix and higher realizations. EBIT margins disappointed –
2QFY11 margin at 22% vs. 30% in 1Q, as benefits from higher LME prices were
partially offset by escalating fuel costs and staff costs (VRS pay-out of
Rs220mn in 2Q).
Copper: Copper division continued to disappoint – while
volumes were up 5% yoy, 23% qoq, sharply lower TC-RC rates led to a lowerthan-
expected EBIT (-41% yoy). The company announced temporary
disruption to copper production at Dahej, leading to a loss of output of 8kt in
3QFY11 (2% of FY10 prodn). All greenfield and brown field expansion projects
are on track, with financial closure achieved only for Utkal alumina, scheduled
to be commissioned in 2QFY12.
What to do with the stock
We maintain Neutral and our 12m P/B-based Rs207 TP. At current price
levels we see balanced risk-reward for Hindalco - the stock is trading at
FY12E P/B of 1.5x (mid cycle:1.4x) vs. 13% ROE. With India operations
reporting muted operating performance, the focus would be on earnings of
Novelis (50% contribution to consolidated EBITDA), which will report on 10
Nov. Risks: stronger-than-expected LME prices; delays in project execution.
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