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Hindalco Industries
Neutral; HALC.BO, HNDL IN
Novelis: Earnings growth momentum continues to slow
• Adj. EBITDA slightly below estimates: Novelis reported 3Q FY11
adj. EBITDA of $238MM (+20% y/y, the lowest increase in last 3
qtrs) and YTD adj. EBITDA to $791MM, on track to achieve full year
adj. EBITDA of $1B+ (TTM at $1.022B; FY11E JPMe: $1.15B). 3Q
FY11 adj. EBITDA/MT was $317/MT, down from the peak 2Q FY11
level of $378/MT. We believe 4Q FY11 will show a strong growth
(adj. EBITDA/MT stood at $306/mt in 4QFY10 vs the average of
$344/mt YTD), but earnings momentum should slow from 1Q FY12
given the high base, combined with little volume growth, and limited
margin expansion. Volumes declined 2% sequentially in the quarter
due to seasonality in North America (-3% q/q) and Europe (-8% q/q),
but emerging markets reported +10% q/q growth in shipments.
• Balance sheet restructuring provides flexibility: Novelis completed
its refinancing in Dec-10 with $4B fund raising to repay the existing
bondholders, term loan and then distributed $1.7B to the parent HNDL.
We expect the $1.7B payout to parent to go towards repayment of debt
at SPV level of ~$1B (as per our estimates) and the remainder to be
paid down to Hindalco, which it would likely use to fund capex. This
recapitalization would provide Novelis with the flexibility to invest in
its business, improve the maturity profile (2014/15 to 2017/20), and
allow fungibility of cash to parent. Novelis net debt increased to $3.9B
($2.2B as of Mar-10) and this, in our view, shows the management’s
confidence in Novelis operating performance and cash flows. Liquidity
was at $848MM in 3Q FY11 and Novelis is looking at maintaining
liquidity at least $750MM in most quarters.
• Comfortable liquidity to support expansion programs: YTD FCF
was $216MM (adjusted for change in financing of working capital) and
on-track to exceed FY10 FCF of $355MM this year. Novelis YTD
capex was $132MM and management reiterated FY11 capex guidance
of $250MM. The company outlined its capex program besides the
Brazil expansion and highlighted its plan to ‘significantly invest in its
business over the next few years’, such as recycling investments and
exploring opportunities in Asia. Novelis will release ~250Kt capacity
globally by investing just $80MM over the next 24 months. The
company has also identified 50% of its debottlecking initiatives to be
implemented in FY12. Novelis is in the process of closing its high-cost
Bridgnorth facility (by Apr-11) and a smelter in Aratu, Brazil
(completed in 3Q FY11), which will help reduce costs and focus on its
core rolling operations. These footprint optimization steps will help
improve EBITDA by ~$30MM.
• Aluminum consumption to remain strong: Novelis expect aluminum
demand to remain strong from all sectors. In the short term,
management expects growth in transportation at 20%, electronics at
25+% and beverage cans at 3-5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco Industries
Neutral; HALC.BO, HNDL IN
Novelis: Earnings growth momentum continues to slow
• Adj. EBITDA slightly below estimates: Novelis reported 3Q FY11
adj. EBITDA of $238MM (+20% y/y, the lowest increase in last 3
qtrs) and YTD adj. EBITDA to $791MM, on track to achieve full year
adj. EBITDA of $1B+ (TTM at $1.022B; FY11E JPMe: $1.15B). 3Q
FY11 adj. EBITDA/MT was $317/MT, down from the peak 2Q FY11
level of $378/MT. We believe 4Q FY11 will show a strong growth
(adj. EBITDA/MT stood at $306/mt in 4QFY10 vs the average of
$344/mt YTD), but earnings momentum should slow from 1Q FY12
given the high base, combined with little volume growth, and limited
margin expansion. Volumes declined 2% sequentially in the quarter
due to seasonality in North America (-3% q/q) and Europe (-8% q/q),
but emerging markets reported +10% q/q growth in shipments.
• Balance sheet restructuring provides flexibility: Novelis completed
its refinancing in Dec-10 with $4B fund raising to repay the existing
bondholders, term loan and then distributed $1.7B to the parent HNDL.
We expect the $1.7B payout to parent to go towards repayment of debt
at SPV level of ~$1B (as per our estimates) and the remainder to be
paid down to Hindalco, which it would likely use to fund capex. This
recapitalization would provide Novelis with the flexibility to invest in
its business, improve the maturity profile (2014/15 to 2017/20), and
allow fungibility of cash to parent. Novelis net debt increased to $3.9B
($2.2B as of Mar-10) and this, in our view, shows the management’s
confidence in Novelis operating performance and cash flows. Liquidity
was at $848MM in 3Q FY11 and Novelis is looking at maintaining
liquidity at least $750MM in most quarters.
• Comfortable liquidity to support expansion programs: YTD FCF
was $216MM (adjusted for change in financing of working capital) and
on-track to exceed FY10 FCF of $355MM this year. Novelis YTD
capex was $132MM and management reiterated FY11 capex guidance
of $250MM. The company outlined its capex program besides the
Brazil expansion and highlighted its plan to ‘significantly invest in its
business over the next few years’, such as recycling investments and
exploring opportunities in Asia. Novelis will release ~250Kt capacity
globally by investing just $80MM over the next 24 months. The
company has also identified 50% of its debottlecking initiatives to be
implemented in FY12. Novelis is in the process of closing its high-cost
Bridgnorth facility (by Apr-11) and a smelter in Aratu, Brazil
(completed in 3Q FY11), which will help reduce costs and focus on its
core rolling operations. These footprint optimization steps will help
improve EBITDA by ~$30MM.
• Aluminum consumption to remain strong: Novelis expect aluminum
demand to remain strong from all sectors. In the short term,
management expects growth in transportation at 20%, electronics at
25+% and beverage cans at 3-5%.
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