BofA Merrill Lynch: Buy Hindalco Industries :: Novelis – a slight blip

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Hindalco Industries -Novelis – a slight blip

Event
 3Q FY11 impacted by one offs: Hindalco’s subsidiary, Novelis, reported
results for 3Q FY11, which were lower than our estimates, impacted by onetime charges of $94mn due to early extinguishment of debt and restructuring
charges. However it remains on track to achieve US$1bn adjusted EBITDA as
guided for FY11.

Impact
 Earnings momentum continues: Net sales of $2.6bn in 3Q FY11 were up
21% YoY, driven by a 10% increase in shipments and realisation.
Operating EBITDA of $225mn is up from $153mn last year, though slightly
below our estimate of $255mn. PAT at -$76mn (compared to $28mn last
year and $61mn last quarter) was impacted by a one-time charge due to
refinancing of debt.
 Full-year target to be surpassed: Novelis has clocked adjusted EBITDA of
$791m in the first nine months of FY11, which is 79% of our full-year estimate
of $995m. We believe that Novelis is on track to achieve our full-year numbers
and that it will be able to meet its full-year EBITDA guidance of $1bn, as
market conditions remain buoyant across all geographies.
 Free cash flow to be constrained: Novelis reported free cash flow of $45mn
for the quarter, compared to $97mn in 2Q, impacted by rising LME prices and
refinancing activities. We believe that rising aluminium prices as well as
capital spending will continue to eat into cash flow. For every $100/t increase
in LME price, we estimate that Novelis will see an increase of $30mn in
working capital.
 Refinancing – the right move: Novelis has recently refinanced its debt of
$2.5bn with new $4bn debt. Though the debt now has an interest cost of
8.5%, the restrictions on old debt on dividend payment no longer exist. This
has opened avenues for raising financing for the US$7bn of capex to triple the
aluminium capacity in India.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs286.00 based on a PER methodology.
 Catalyst: Further price increases by Novelis and strength in Aluminium prices.
Action and recommendation
 Maintain Outperform: We view Hindalco as the best aluminium play in the
region and a de-risked way to play the short-term strength in aluminium
prices. Stable earnings from Novelis (which contributes 60% of earnings),
should provide a buffer, while its low-cost Indian operations provide leverage
to rising aluminium prices. Maintain Outperform.