Hindalco-Capex spend accelerates.: Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Hindalco Industries (HNDL)
Metals
Capex spend accelerates, increase in cost structure a concern. Standalone EBITDA
of Rs7 bn for 2QFY11 (-16.1% qoq, +14.6% yoy) is in line with our estimate.
Sequential performance was impacted by outage at Hirakud smelter, increase in power
and fuel expenses, wage costs and VRS provision. Capex spend at Rs20 bn, accelerated
qoq. We will align our estimates and target price to our revised aluminium price
forecast post Novelis results. Maintain ADD





2QFY11 performance in line with our estimate; COP increase, a concern
Hindalco reported 2QFY11 EBITDA of Rs7 bn (-16.1% qoq, +14.6% yoy) and in line with our
estimate of Rs 6.9 bn. Net income of Rs4.3 bn (-18.8% qoq, +26.1% yoy) was 2.8% higher than
our estimate. 2QFY11 sequential performance was impacted by (1) lower production from lowcost
Hirakud smelter; (2) revision in employee compensation; Hindalco follows the July cycle for its
annual compensation review; (3) higher power and fuel cost despite lower aluminium production.
Monsoons lead to higher moisture content in coal and deterioration of quality; this increases
sourcing of coal from e-auctions and (4) Rs220 mn provision for VRS after the company shut its
Kalwa downstream aluminum facility.

Aluminium business segment performance impacted by lower production and seasonality
Aluminium segment reported net revenues of Rs19.1 bn (+2.3% qoq, +15.8% yoy), 14.6% above
our estimate of Rs16.7 bn. Realization of US$3,333/ ton was 11.5% higher than our estimate.
Production of value added products increased to 51.6% of total production (43.5% in 1QFY11)
despite lower aluminum production. Aluminium EBIT declined 23.2% qoq but grew 63.9% yoy to
Rs4.2 bn. Sequential decline EBIT can be partly attributed to the seasonal factor (higher coal cost)
and lower production on account of outage at the Hirakud smelter.

Copper business segment
Copper EBIT fell to Rs1.3 bn (+3.8% qoq, -40.7% yoy), 7.5% below our estimates. Production of
94K tons was higher than expected. Expect copper segment performance to remain muted.
Revisit our earnings and valuations post Novelis results tomorrow, Retain ADD
Hindalco is an ideal mix of steady cash-flow generating business (Novelis) that can potentially fund
significant value accreting new Greenfield projects. This expansion-led volume growth along with
steady aluminium prices will result in strong earnings growth (domestic operations) for the
company going forward. We will incorporate revised aluminum price forecast and review our
target price post Novelis’ quarterly results declaration. We retain our ADD rating.


Capacity expansion programs on track
Hindalco spent Rs20 bn on capex, close to 20% of FY2011E capex guidance. Hindalco has a
massive capacity expansion program that may triple aluminium and alumina capacities. It
reiterated that all project completion schedules are on track and on the competitiveness on
the cost of production from Mahan and Aditya Aluminium smelters.