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HINDALCO INDUSTRIES
Novelis Q2FY11 results: Another strong performance
Adjusted EBITDA touches new high of USD 290 mn
Novelis reported Q2FY11 net revenue of USD 2.5 bn, which was in line with our
estimate. Volumes, at 767 kt, were slightly lower than our estimate of 779 kt.
Adjusted EBITDA, at USD 290 mn, was above our estimate of USD 263 mn. Net
profit came in at USD 62 mn.
Proposed closure of Bridgnorth facility
The company is looking to shut down its Bridgnorth facility in Europe as it is a
high cost business (plant primarily caters to the foil market, which is facing
overcapacity in Europe). This is an initiative to shift focus to high margin
products. It expects to accrue cost savings of USD 15 mn through this shutdown.
Capacity to increase ~20% by FY14E
Novelis is planning to increase its capacity by ~600 kt by FY14E through ~300 kt
of debottlenecking across all regions and ~220 kt from brown field expansion in
Brazil. Capex for the debottlenecking exercise is likely to be less than USD 80
mn. Thus, it is expected to achieve higher returns from this capacity expansion.
FCF increases to USD 97 mn from USD 34 mn sequentially
The company achieved FCF of USD 97 mn during the quarter. It is on track to
exceed FY10 FCF of USD 355 mn. Capex guidance for FY11 is USD 250 mn as
earlier mentioned. YTD capex is only USD 71 mn as Novelis deferred capex
spend in H1FY11 to cater to the growing market demand.
Outlook and valuations: Impressive performance; maintain ‘BUY’
Novelis is on track to exceed its EBITDA guidance of USD 1 bn in FY11.
Management expects near term volume growth of 3-4% through
debottlenecking. We see continued pricing power for Novelis with EBITDA/t at all
time high of USD 379/t. This is led by increased focus on high premium products
while keeping costs under control.
We see strength in the overall business model of Hindalco with volatility in the
upstream India business negated by the steady business at Novelis. We retain
our estimates for Novelis and maintain ‘BUY/SO’ recommendation/rating on
Hindalco with a fair valuation of INR 290.
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