HINDALCO - Standalone results: Higher costs hit margins: Edelweiss

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HINDALCO INDUSTRIES
Standalone results: Higher costs hit margins



􀂃 Revenue modestly higher; PAT below expectation
Hindalco Industries (standalone) reported Q2FY11 net revenue of INR 58.6 bn,
above our estimate of INR 56.0 bn, largely due to higher volumes and better
product mix in the aluminium business. EBITDA, at INR 6.9 bn, was below our
estimate of INR 8.2 bn led by higher raw material, power, employee costs and
one-time VRS costs of INR 220 mn. Thus, PAT came in at INR 4.3 bn, lower than
our estimate of INR 5.2 bn.


􀂃 Aluminium business: PBIT declines 23% Q-o-Q led by lower volumes
In spite of volumes dipping 12% Q-o-Q due to the Hirakud outage, revenue rose
2% sequentially, as proportion of value-added products (VAP) increased from
47% in Q1FY11 to 52% in Q2FY11. PBIT, however, at INR 4.2 bn declined 23%
Q-o-Q due to lower proportion of Hirakud volumes, one-time costs related to the
Hirakud outage, and overall cost inflation.

􀂃 Copper business: PBIT up 4% Q-o-Q
Though copper production jumped 23% Q-o-Q, PBIT at INR 1.3 bn rose only 4%
due to lower spot TcRc and increased energy costs. Production loss of ~8,000
tonnes is expected at the copper plant due to breakdown of the sulphuric acid
plant’s cooling tower in November; this is only ~2.5% of FY11 copper volume
estimates. The company expects to cover the loss through insurance claim.

􀂃 Green field projects on track; contract labour increases at sites
All projects are progressing as per schedule (over Q2FY12 to Q3FY12). At Utkal
and Mahan project sites deployed contract labour has increased Q-o-Q by a total
of 4,000. We estimate Hindalco to have spent ~ INR 20 bn on these projects in
H1FY11 (FY11 target: INR 100 bn).

􀂃 Outlook and valuations: Stability expected; maintain ‘BUY’
We expect the Hirakud smelter to ramp up in H2FY11 and also power costs to
decline moderately in H2FY11 as quality of coal linkage improves. Copper spot
TcRc have recently increased sharply to USD 80/t (not assumed in our earnings).
Aluminium prices have recovered sharply to USD 2,400/t currently, with upside
possibilities in Q4FY11. One-time benefit from insurance claims related to the
Hirakud outage is an additional upside not considered currently. We maintain our
forward estimates, our fair value of INR 290/share, and our ‘BUY/SO’
recommendation/rating on the stock.