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Hindalco Industries (HNDL)
Metals & Mining
Adjusted EBITDA lower than expected. Novelis reported adjusted EBITDA of US$238
mn (+20% yoy), marginally lower than our estimate of US$250 mn. EBITDA/ton
increased 8.8% yoy to US$317/ton but declined 16.2% qoq, possibly on account of
non-recurrence of gain on FX measurement and metal price lag. Despite a modest
quarter, we believe that Novelis is set for sustainable EBITDA generation of US$1 bn +.
Capacity expansion and further increase in conversion premium will help. We maintain
our positive view on Hindalco; estimates will be reviewed post Hindalco results.
Novelis reports strong yoy growth but lower-than-expected adjusted EBITDA
Novelis reported adjusted EBITDA of US$238 mn (+20% yoy, -18% qoq) marginally lower than
our estimate. EBITDA/ton at US$317 increased 8.8% yoy but declined 16.2% qoq. Note that
profitability on sequential basis was impacted by non-recurrence of gain on FX measurement and
metal price lag. Adjusted for these two items, EBITDA/ton was largely stable on sequential basis.
Shipments of 751Kt were strong for a seasonally weak quarter and grew 10%. Conversion
premium increased further (+4.8% qoq to US$1,259) but was offset by increase in cost. Novelis
reported net loss of US$46 mn vs profit of US$68 mn in 3QFY10 and US$62 mn in 2QFY11. We
attribute the swing to (1) US$74 mn charge on early extinguishment of debt and (2) restructuring
cost of US$20 mn related to closure of Bridgnorth, UK and Aratu, South America facilities.
Refinances Novelis debt, refinancing costs surprisingly high
Novelis refinanced US$4.8 bn debt with relaxed covenants to ensure cash fungibility and drive
efficient capital structure. New debt has longer tenure with debt maturity in 2017/20. Revised debt
covenants provide headroom for more leverage with net debt/adjusted EBITDA of up 4.75X in
FY2012E and 4X by FY2016E. Novelis has to maintain interest coverage ratio of more than 2X.
Post restructuring, Novelis’ debt increased to US$4.1 bn from US$2.5 bn in 2QFY11. Novelis also
paid out US$1.7 bn to Hindalco, resulting in decline in shareholder funds to US$422 mn.
However, refinancing cost of US$174 mn (inclusive of tender premiums, arranger fees etc.) was
surprisingly high at 3.7% of debt refinanced. Novelis expenses US$74 mn in 3QFY11 with the
balance capitalized and to be amortized over a period of 7-10 years.
Free cash generation impacted by restructuring costs, higher working capital
Novelis generated free cash flow of US$45 mn in 3QFY11. FY2011E FCF may be lower than
FY2010 level of US$355 mn and lower than the company guidance. FCF in FY2011E has been
impacted by (1) debt refinancing costs, and (2) increase in aluminium prices; a US$100/ton
increase in aluminium price increases working capital by US$30-40 mn. On the positive side,
Novelis has done a remarkable job in reducing receivables cycle.
Value accretive capacity expansion
Novelis maintained FY2011E capex guidance of US$250 mn and has spent US$132 mn till
9MFY11. Novelis maintained its capacity expansion guidance of 3-4% every year through
FY2014E through debottlenecking initiatives. This incremental capacity will be at a marginal
capex cost of US$80 mn. Novelis expects to release at least 90 ktpa of capacity from Europe,
70 ktpa from Asia, 60 ktpa from North America and 30 ktpa from South America. In
addition, the company will derive additional 220 ktpa from Pinda facility in Brazil. To
improve raw material sourcing, Novelis is investing aggressively in recycling plants in South
Korea and South America.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries (HNDL)
Metals & Mining
Adjusted EBITDA lower than expected. Novelis reported adjusted EBITDA of US$238
mn (+20% yoy), marginally lower than our estimate of US$250 mn. EBITDA/ton
increased 8.8% yoy to US$317/ton but declined 16.2% qoq, possibly on account of
non-recurrence of gain on FX measurement and metal price lag. Despite a modest
quarter, we believe that Novelis is set for sustainable EBITDA generation of US$1 bn +.
Capacity expansion and further increase in conversion premium will help. We maintain
our positive view on Hindalco; estimates will be reviewed post Hindalco results.
Novelis reports strong yoy growth but lower-than-expected adjusted EBITDA
Novelis reported adjusted EBITDA of US$238 mn (+20% yoy, -18% qoq) marginally lower than
our estimate. EBITDA/ton at US$317 increased 8.8% yoy but declined 16.2% qoq. Note that
profitability on sequential basis was impacted by non-recurrence of gain on FX measurement and
metal price lag. Adjusted for these two items, EBITDA/ton was largely stable on sequential basis.
Shipments of 751Kt were strong for a seasonally weak quarter and grew 10%. Conversion
premium increased further (+4.8% qoq to US$1,259) but was offset by increase in cost. Novelis
reported net loss of US$46 mn vs profit of US$68 mn in 3QFY10 and US$62 mn in 2QFY11. We
attribute the swing to (1) US$74 mn charge on early extinguishment of debt and (2) restructuring
cost of US$20 mn related to closure of Bridgnorth, UK and Aratu, South America facilities.
Refinances Novelis debt, refinancing costs surprisingly high
Novelis refinanced US$4.8 bn debt with relaxed covenants to ensure cash fungibility and drive
efficient capital structure. New debt has longer tenure with debt maturity in 2017/20. Revised debt
covenants provide headroom for more leverage with net debt/adjusted EBITDA of up 4.75X in
FY2012E and 4X by FY2016E. Novelis has to maintain interest coverage ratio of more than 2X.
Post restructuring, Novelis’ debt increased to US$4.1 bn from US$2.5 bn in 2QFY11. Novelis also
paid out US$1.7 bn to Hindalco, resulting in decline in shareholder funds to US$422 mn.
However, refinancing cost of US$174 mn (inclusive of tender premiums, arranger fees etc.) was
surprisingly high at 3.7% of debt refinanced. Novelis expenses US$74 mn in 3QFY11 with the
balance capitalized and to be amortized over a period of 7-10 years.
Free cash generation impacted by restructuring costs, higher working capital
Novelis generated free cash flow of US$45 mn in 3QFY11. FY2011E FCF may be lower than
FY2010 level of US$355 mn and lower than the company guidance. FCF in FY2011E has been
impacted by (1) debt refinancing costs, and (2) increase in aluminium prices; a US$100/ton
increase in aluminium price increases working capital by US$30-40 mn. On the positive side,
Novelis has done a remarkable job in reducing receivables cycle.
Value accretive capacity expansion
Novelis maintained FY2011E capex guidance of US$250 mn and has spent US$132 mn till
9MFY11. Novelis maintained its capacity expansion guidance of 3-4% every year through
FY2014E through debottlenecking initiatives. This incremental capacity will be at a marginal
capex cost of US$80 mn. Novelis expects to release at least 90 ktpa of capacity from Europe,
70 ktpa from Asia, 60 ktpa from North America and 30 ktpa from South America. In
addition, the company will derive additional 220 ktpa from Pinda facility in Brazil. To
improve raw material sourcing, Novelis is investing aggressively in recycling plants in South
Korea and South America.
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