Hindalco Industriest: Look Beyond 2Q :: Citi

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Hindalco Industries (HALC.BO)
Alert: Look Beyond 2Q
 2QFY11 PAT below expectations — Hindalco’s standalone PAT rose 26% yoy to
Rs4.3bn (9% below Citi estimate) on the back of higher aluminium LME prices, a
better mix and higher by-product prices in the copper business. PAT would have
been higher but for rupee appreciation (46.8 vs. 48.4), lower volumes at Hirakud
(due to production disruption since July 2010), low copper TC/RCs and higher
employee costs (VRS at Kalwa Foil plant). EBITDA rose 15% to Rs7bn.


 2Q aluminium EBIT margin at 22% — EBIT was 64% higher yoy and EBIT margin
rose from 15.7% in 2QFY10. This was largely due to a 16% rise in aluminium LME
prices (US$2,082/t vs US$1,806/t) and sales of value-added products. The
margins were lower sequentially (from 29.6% in 1Q) due to lower metal production
and the Rs220m VRS impact at Kalwa. Metal output was 123k tonnes (-12%
qoq/yoy). The Hirakud smelter capacity is being restored and should be fully
operational by 4QFY11. The company has a comprehensive insurance policy
which covers property damage and business interruptions.

 Copper: a difficult quarter — EBIT fell 41% yoy to Rs1.3bn despite higher byproduct
prices, a better mix and operational efficiencies. The division was
adversely impacted by lower TC/RCs and higher energy costs. 2Q cathode
production rose 5% to 94kt but copper rod production growth was stronger at 41%
(43kt). The recent production disruption at the Dahej Copper plant (in Gujarat)
should be repaired in 2-3 weeks (impacts 3Q). Though production loss is 8,000
tonnes, Hindalco has insurance cover for loss due to such breakdowns.

 Project updates — 1) Hindalco is transferring equipment from Rogerstone, UK to
Orissa. When installed by 2QFY12, it will enable the company to produce canbody
stock for the domestic/export markets. 2) The 1.5m tpa, Rs56bn Utkal
Alumina project in Orissa is expected to be completed by 2QFY12 and will supply
alumina to the aluminium smelters being set up in MP and Orissa. 3) The two
smelter projects (359kt smelter/900MW power/Rs92bn each) should be completed
in 2HFY12, adding significantly to the volumes. (Current capacity is ~500kt). 4) In
addition, a 1.5m tpa alumina refinery (in MP) and another 359kt smelter (in
Jharkhand) are expected to be completed in FY14.

 Positive outlook for Hindalco — We are in the process of updating our estimates
on the back of Citi’s new commodity forecasts and also await Novelis’ 2Q results
(on Wed, 10 Nov). Our aluminium price forecasts for FY11-13 have been raised by
9-15% to US$2,288-2,623/t. In addition, we expect contract copper TC/RCs to
settle at US19c/lb in FY12 vs 14c/lb in FY11. Novelis’ steady profit trends should
continue (1Q EBITDA/t US$338) and provide downside support.