Hindalco - Q2 standalone earnings miss estimates- JPMorgan

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Hindalco Industries Underweight
HALC.BO, HNDL IN
Q2 standalone earnings miss estimates driven by all
round cost pressures



HNDL reported Q2FY12 results below estimates even after adjusting for
lower aluminum production on higher costs. Given the stock’s recent sharp
rally (15% over last 15 days), we expect the market to react negatively. We
estimate capex in H1 stood at Rs~20bn. Novelis reports tomorrow. We are
currently reviewing our earnings estimates.


• Q2 standalone numbers significantly below estimates: HNDL reported
Q2 PAT at Rs4.4bn (+26% y/y, -19% q/q) against JPMe of Rs4.5bn and
Bloomberg consensus estimates of Rs5.07bn. EBITDA at Rs6.69bn (+15%
y/y, -16% q/q) was also below JPMe of Rs7.4bn and consensus estimates of
Rs8.4bn. While Q2 was expected to be weak given the loss of volumes from
the Hirakud smelter (aluminum production was down ~17KT, -12% q/q,
given outage at some of the pots), we believe the cost pressures are likely to
be taken negatively by the street
• Aluminum sees cost pressures in power and fuel, higher employee costs:
While there was Rs220mn of one-time employee expenses, adjusted for that
wage costs increased 15% q/q. We believe this is likely the new wage base
going forward. Power and fuel expenses increased by 33% q/q even as
aluminum production was lower by 12% q/q, given increasing coal and fuel
costs. As a result, even though LME aluminum prices were broadly flat q/q,
aluminum PBIT margins dropped sharply by 740bps q/q to 22.2% in Q2.
While production should recover in Q3, we believe cost pressures are
unlikely to ease materially. HNDL has not yet booked any income from the
insurance claim regarding the pot outages in the smelter
• Copper production up 23% q/q, PBIT flat q/q: Even as copper cathode
production was higher by 23% q/q, copper PBIT was flat q/q at Rs1.29bn
mainly on account of lower sulfuric acid prices. HNDL sources ~70% of its
copper concentrate requirements on annual contracts and hence to the extent
the recent rally in spot Tc/Rc's sustain, it would be positive for the copper
business.
• Implied H1 capex at Rs20bn: As per our calculation from the March and
Sept quarter balance sheets, HNDL’s capex stood at Rs20.4bn. Given the
spate of green-field and brown-field projects under implementation, we
would expect this number to spike up sharply in H2FY11E. HNDL expects
to commission the alumina refinery in Q2FY12E (implying under 12 months
from now), Mahan aluminum smelter also in Q2FY12E and the Aditya
aluminum smelter project in Q3FY12E. Total project costs on these 3
projects as per the company is Rs240bn.
• Novelis reports tomorrow-We are currently reviewing our earnings
estimates.