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RESULT UPDATE
Hindalco Industries — All positives priced in
Hindalco Industries — All positives priced in
Novelis sees profitability improvement but aided by external factors
In 2QFY11, Novelis recorded total volumes of 767kt. 2% below our expectation of 787kt as volumes were negatively impacted by a strike in Asia. Adjusted EBITDA was US$290mn, compared to our expectation of US$268mn. Adjusted EBITDA per tonne of FRP volumes increased sequentially further from US$353/t in 1QFY11 to US$393/t. The improvement was helped by the positive impact of metal price lag and FX re-measurements (US$19mn and US$20mn respectively). Over the next few quarters, these benefits may not continue and hence could have a sobering impact on Adjusted EBITDA per tonne.
Indian operations: Strong Copper volumes were the only positive
Standalone topline in 2QFY11 at Rs58.6bn was higher than expected (Rs52.1bn) on account of better than expected copper volumes. However, copper operating profit margins dipped further from 3.7% in 1QFY11 to 3.3% in 2QFY11 on account of TcRc margins and higher energy costs. Aluminium margins too slipped from 29.6% in 1QFY11 to 22.2% (23.3% adjusting for one-off in employee cost) in 2QFY11 on account of higher Employee as well as Power & fuel costs.
Going forward, Novelis’ strategy should be value-accretive over the long-term while domestic operations should see cost pressures
Capacity debottlenecking should aid Novelis’ volume growth by 3-4% p.a. and will be highly profitable as it will involve capex of less than USD80mn p.a. This, along with the recent pricing increase, the proposed Bridgenorth closure (which will reduce costs by US$15mn p.a.) and the focus on improved product mix will aid profitability growth over the long-term. In domestic operations, power & fuel costs will continue to be high driven by increase in crude prices. Employee costs on the other hand, which were adversely impacted in Q2 by Rs220mn on account of the VRS scheme at Kalwa foil plant, should drop in Q3.
Downgrade recommendation to HOLD, TP revised to Rs245 (Sep’11)
The current stock price appears to factor in LME aluminium prices of $2,300-2,350/t. Whilst global liquidity (especially post QE2) could push LME prices higher, fundamental factors such as cost curve do not seem to warrant sustained higher levels of metal prices. Hence the current stock price does not leave adequate upside for investors. We therefore downgrade our recommendation from BUY to HOLD while rolling forward our valuation to Rs245 (previous: Rs200). The stock trades at 7.6x FY12E EV/EBITDA.
In 2QFY11, Novelis recorded total volumes of 767kt. 2% below our expectation of 787kt as volumes were negatively impacted by a strike in Asia. Adjusted EBITDA was US$290mn, compared to our expectation of US$268mn. Adjusted EBITDA per tonne of FRP volumes increased sequentially further from US$353/t in 1QFY11 to US$393/t. The improvement was helped by the positive impact of metal price lag and FX re-measurements (US$19mn and US$20mn respectively). Over the next few quarters, these benefits may not continue and hence could have a sobering impact on Adjusted EBITDA per tonne.
Indian operations: Strong Copper volumes were the only positive
Standalone topline in 2QFY11 at Rs58.6bn was higher than expected (Rs52.1bn) on account of better than expected copper volumes. However, copper operating profit margins dipped further from 3.7% in 1QFY11 to 3.3% in 2QFY11 on account of TcRc margins and higher energy costs. Aluminium margins too slipped from 29.6% in 1QFY11 to 22.2% (23.3% adjusting for one-off in employee cost) in 2QFY11 on account of higher Employee as well as Power & fuel costs.
Going forward, Novelis’ strategy should be value-accretive over the long-term while domestic operations should see cost pressures
Capacity debottlenecking should aid Novelis’ volume growth by 3-4% p.a. and will be highly profitable as it will involve capex of less than USD80mn p.a. This, along with the recent pricing increase, the proposed Bridgenorth closure (which will reduce costs by US$15mn p.a.) and the focus on improved product mix will aid profitability growth over the long-term. In domestic operations, power & fuel costs will continue to be high driven by increase in crude prices. Employee costs on the other hand, which were adversely impacted in Q2 by Rs220mn on account of the VRS scheme at Kalwa foil plant, should drop in Q3.
Downgrade recommendation to HOLD, TP revised to Rs245 (Sep’11)
The current stock price appears to factor in LME aluminium prices of $2,300-2,350/t. Whilst global liquidity (especially post QE2) could push LME prices higher, fundamental factors such as cost curve do not seem to warrant sustained higher levels of metal prices. Hence the current stock price does not leave adequate upside for investors. We therefore downgrade our recommendation from BUY to HOLD while rolling forward our valuation to Rs245 (previous: Rs200). The stock trades at 7.6x FY12E EV/EBITDA.
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