Hindalco : Novelis 2Q11 results a positive surprise:: HSBC

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Hindalco (HNDL IN)
OW(V): Novelis 2Q11 results a positive surprise following
HNDL stand-alone negative surprise

 EBITDA/t of USD393/t surprises positively; better cost mgmt
helps, but some part of q-o-q surprise unexplained
 Focus on capital allocation increase; we sense potential for
pursuit of acquisition as Alcan non-compete expires
 Retain estimates with INR260 TP and Overweight (V) rating





Strong showing for fiscal 2Q11; some parts driven by unallocated items, though
 Adjusted EBITDA of Novelis subsidiary was USD290m, up 10% q-o-q and 45%
y-o-y. Per ton adjusted EBITDA/t at USD393 highest ever (see Exhibit 1 on page 3).
 Some part of sequential improvement was a change in unallocated items (highlighted
in Exhibit 1). Adjusted for further ‘clean-ups’, sequential EBITDA/t fell 10%.
 Shipments were marginally lower q-o-q due to a 13-day strike at the Korean plant
(since resolved). Revenue per ton was almost flat q-o-q, signalling a cost savingsdriven
sequential increase in EBITDA (see Exhibit 2 on page 3).
 Free cash flow at USD97m almost tripled q-o-q (was negative in 2Q10). Strong 1H
increase in working capital (cUSD200m) is somewhat concerning to us.
 Post-HNDL stand-alone and Novelis results, we estimate 1H consolidated EBITDA at
INR40-43bn, in line with our FY11e of INR85bn; we retain our FY11 estimates


Incremental focus on capital allocation; we sense a potential acquisition
 Non-compete with Alcan expires in 2010; Hindalco could seek to acquire aerofocus
companies. Starting a business from scratch may be difficult, though an
acquisition appears to be a possibility, especially with huge FCF and negative
dividend covenants for the next two years.
 Capacity expansion of 30% over the next three years; c400kt de-bottlenecking at
USD80m seems appealing, and 220kt expansion at Pinda (Brazil) to fully commission
by FY13.
 Shutdown of Bridgnorth (high-cost foil operations) to allow Norf ingot production
to be shifted to can sheet production; operating costs savings of cUSD15m.


We value Hindalco based on FY12e EV/EBITDA. Our target price is INR260. We rate
the stock OW(V). Downside risks: lower-than-expected aluminium prices, copper TC/RCs
and operational performance at Novelis, and timely execution of expansion projects.