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HINDALCO INDUSTRIES
Novelis’ Q3FY11 results: Operationally strong; one-offs dent PAT
Adjusted EBITDA, at USD 240 mn, in line with estimates
Novelis reported Q3FY11 volumes at 751 kt, higher than our estimate of 721 kt.
Adjusted EBITDA, at USD 240 mn, was in line with our estimate of USD 243 mn.
Net loss was higher at USD 46 mn [our estimate: USD (9) mn] due to one-time
charges of USD 74 mn associated with the USD 4 bn debt refinancing, USD 20
mn for restructuring activities related to the closure of its Bridgnorth and Aratu
facilities and tax provision of USD 33 mn in spite of a PBT loss.
FCF declines Q-o-Q, but to pick up sharply in Q4FY11
FCF declined to USD 45 mn in Q3FY11 from USD 97 mn in Q2FY11 due to
refinancing related costs, higher capex and increased working capital on account
of higher LME prices. However, for Q4FY11, the company expects FCF of ~USD
140 mn, which implies strong Q-o-Q improvement in EBITDA. YTD capex spent is
USD 132 mn. The company has guided for Q4FY11 capex at ~USD 120 mn, as it
looks to accelerate spending on capacity expansion in Brazil, recycling activities
and plant & equipment maintenance.
Focus on debottlenecking and recycling activities
As guided earlier, the company is focused on increasing its capacity by ~250 kt
through debottlenecking across regions by FY14, which would lead to 3-4%
volume growth per annum. Novelis continues to invest in recycling facilities. It
recently announced investment of USD 18 mn for expanding recycling capacity
by 0.5 mt at its recycling center in Germany. Further, it is planning recycling
initiatives in Korea as well, all of which will boost EBITDA/t.
Likelihood of further return of capital to parent
Further return of capital to parent is likely, considering that liquidity needs to be
maintained at USD 750 mn (currently, USD 848 mn) and future capex could be
funded through profitability. No tax has been paid at Novelis for the return of
capital of USD 1.7 bn to the parent. Sustained profitability is expected to
effectively cause net debt to fall in the coming years.
Outlook and valuations: Robust demand; maintain ‘BUY’
Management remains bullish on global rolled aluminium demand with
transportation, electronics and can segments growing 15%, 10% and 3-4% p.a.,
respectively, in 2010-14. We estimate Novelis to register FY11 EBITDA of USD
1,080 mn against our estimate of USD 1,001 mn and exceed our FY12 EBITDA
estimate of USD 1,051 mn. We will review our consolidated estimates post
declaration of standalone results. We expect one-time costs related to Hirakud
smelter in Q3FY11 and will watch for cost pressure in the standalone aluminium
business. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on
Hindalco, with a fair valuation of INR 291.
Shipments up 10%; Europe disappoints due to currency losses, cost pressure
Total shipments for the quarter, at 751 kt, were up 10% Y-o-Y, but down 2% Q-o-Q due
to seasonal slowness. Rolled product shipments were up 8% Y-o-Y in North America,
largely due to growth in can, automotive and other industrial products. Europe also
witnessed 10% Y-o-Y volume growth, led by improved demand in the premium car
segment. However, European EBIDTA/t declined sharply from USD 418/t in Q2FY11 to
USD 249/t due to non-metal cost pressure and currency losses of USD 10 mn.
For 2011, Novelis expects transportation and electronic segments to be global demand
drivers with 20% and 25%+ growth, respectively, Y-o-Y; the can segment is likely to be
steady at 3-5% Y-o-Y.
Other conference call highlights
• Brazilian expansion of 200ktpa is on track for completion by 2012 end at the
targeted capex of USD 300 mn
• Closure of loss-making facilities in Europe and South America to increase EBITDA by
USD 30 mn
• Capitalised debt refinancing cost of ~USD 126 mn, which would be amortised over
the next 7-10 years, marginally impacting profits
• Accumulated inventory in Q3FY11 which could drive sales in Q4FY11 and Q1FY12
Company Description
Hindalco is one of the largest aluminium producers in India with 514,000 tonnes of
upstream aluminium facility/capacity and backward linkage in alumina (1.5 mtpa) and
bauxite (reserves of 65 mn tonnes). It also operates India’s largest copper smelter with
a capacity of 500,000 tonnes at Dahej with a captive power plant, jetty, and ~20-25%
backward linkage in copper concentrate through Aditya Birla Mineral (a 51% subsidiary).
In February 2007, Hindalco acquired Novelis, a 3.4 mtpa aluminium rolled-products
producer, for enterprise value of USD 6.2 bn. Novelis has 33 operating plants and 3
research facilities in 11 countries, across 4 continents.
The company is in expansion mode and plans to increase its alumina capacity five-fold to
5.0 mtpa (from 1.5 mtpa currently) and aluminium capacity to 1.7 mtpa, with total
capital outlay of INR 407.5 bn in the next five years. The green field phases of these
projects, which are back-ended, will only come on stream starting end of FY12E.
Investment Theme
We have a positive outlook on aluminium led by strongly increasing demand. Hindalco’s
standalone business is robust with reasonably low cost of producing aluminium (~USD
1,450/tonne currently) and value-added aluminium products, which constitute over 50%
of the volume mix. The company manufactures special grade alumina that commands a
premium of up to ~USD 250/tonne over the regular variety. We expect margin
expansion in Novelis due to overall recovery in developed markets and aluminium.
Novelis is likely to benefit once the impact of metal price ceiling contract expires in
December 2009.
Key Risks
Higher- than- expected increase in input costs.
Lower –than- expected margin expansion and derivative gains at Novelis.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HINDALCO INDUSTRIES
Novelis’ Q3FY11 results: Operationally strong; one-offs dent PAT
Adjusted EBITDA, at USD 240 mn, in line with estimates
Novelis reported Q3FY11 volumes at 751 kt, higher than our estimate of 721 kt.
Adjusted EBITDA, at USD 240 mn, was in line with our estimate of USD 243 mn.
Net loss was higher at USD 46 mn [our estimate: USD (9) mn] due to one-time
charges of USD 74 mn associated with the USD 4 bn debt refinancing, USD 20
mn for restructuring activities related to the closure of its Bridgnorth and Aratu
facilities and tax provision of USD 33 mn in spite of a PBT loss.
FCF declines Q-o-Q, but to pick up sharply in Q4FY11
FCF declined to USD 45 mn in Q3FY11 from USD 97 mn in Q2FY11 due to
refinancing related costs, higher capex and increased working capital on account
of higher LME prices. However, for Q4FY11, the company expects FCF of ~USD
140 mn, which implies strong Q-o-Q improvement in EBITDA. YTD capex spent is
USD 132 mn. The company has guided for Q4FY11 capex at ~USD 120 mn, as it
looks to accelerate spending on capacity expansion in Brazil, recycling activities
and plant & equipment maintenance.
Focus on debottlenecking and recycling activities
As guided earlier, the company is focused on increasing its capacity by ~250 kt
through debottlenecking across regions by FY14, which would lead to 3-4%
volume growth per annum. Novelis continues to invest in recycling facilities. It
recently announced investment of USD 18 mn for expanding recycling capacity
by 0.5 mt at its recycling center in Germany. Further, it is planning recycling
initiatives in Korea as well, all of which will boost EBITDA/t.
Likelihood of further return of capital to parent
Further return of capital to parent is likely, considering that liquidity needs to be
maintained at USD 750 mn (currently, USD 848 mn) and future capex could be
funded through profitability. No tax has been paid at Novelis for the return of
capital of USD 1.7 bn to the parent. Sustained profitability is expected to
effectively cause net debt to fall in the coming years.
Outlook and valuations: Robust demand; maintain ‘BUY’
Management remains bullish on global rolled aluminium demand with
transportation, electronics and can segments growing 15%, 10% and 3-4% p.a.,
respectively, in 2010-14. We estimate Novelis to register FY11 EBITDA of USD
1,080 mn against our estimate of USD 1,001 mn and exceed our FY12 EBITDA
estimate of USD 1,051 mn. We will review our consolidated estimates post
declaration of standalone results. We expect one-time costs related to Hirakud
smelter in Q3FY11 and will watch for cost pressure in the standalone aluminium
business. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on
Hindalco, with a fair valuation of INR 291.
Shipments up 10%; Europe disappoints due to currency losses, cost pressure
Total shipments for the quarter, at 751 kt, were up 10% Y-o-Y, but down 2% Q-o-Q due
to seasonal slowness. Rolled product shipments were up 8% Y-o-Y in North America,
largely due to growth in can, automotive and other industrial products. Europe also
witnessed 10% Y-o-Y volume growth, led by improved demand in the premium car
segment. However, European EBIDTA/t declined sharply from USD 418/t in Q2FY11 to
USD 249/t due to non-metal cost pressure and currency losses of USD 10 mn.
For 2011, Novelis expects transportation and electronic segments to be global demand
drivers with 20% and 25%+ growth, respectively, Y-o-Y; the can segment is likely to be
steady at 3-5% Y-o-Y.
Other conference call highlights
• Brazilian expansion of 200ktpa is on track for completion by 2012 end at the
targeted capex of USD 300 mn
• Closure of loss-making facilities in Europe and South America to increase EBITDA by
USD 30 mn
• Capitalised debt refinancing cost of ~USD 126 mn, which would be amortised over
the next 7-10 years, marginally impacting profits
• Accumulated inventory in Q3FY11 which could drive sales in Q4FY11 and Q1FY12
Company Description
Hindalco is one of the largest aluminium producers in India with 514,000 tonnes of
upstream aluminium facility/capacity and backward linkage in alumina (1.5 mtpa) and
bauxite (reserves of 65 mn tonnes). It also operates India’s largest copper smelter with
a capacity of 500,000 tonnes at Dahej with a captive power plant, jetty, and ~20-25%
backward linkage in copper concentrate through Aditya Birla Mineral (a 51% subsidiary).
In February 2007, Hindalco acquired Novelis, a 3.4 mtpa aluminium rolled-products
producer, for enterprise value of USD 6.2 bn. Novelis has 33 operating plants and 3
research facilities in 11 countries, across 4 continents.
The company is in expansion mode and plans to increase its alumina capacity five-fold to
5.0 mtpa (from 1.5 mtpa currently) and aluminium capacity to 1.7 mtpa, with total
capital outlay of INR 407.5 bn in the next five years. The green field phases of these
projects, which are back-ended, will only come on stream starting end of FY12E.
Investment Theme
We have a positive outlook on aluminium led by strongly increasing demand. Hindalco’s
standalone business is robust with reasonably low cost of producing aluminium (~USD
1,450/tonne currently) and value-added aluminium products, which constitute over 50%
of the volume mix. The company manufactures special grade alumina that commands a
premium of up to ~USD 250/tonne over the regular variety. We expect margin
expansion in Novelis due to overall recovery in developed markets and aluminium.
Novelis is likely to benefit once the impact of metal price ceiling contract expires in
December 2009.
Key Risks
Higher- than- expected increase in input costs.
Lower –than- expected margin expansion and derivative gains at Novelis.
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