Hindalco Industries- Pay-back time ; target rs 280:: Macquarie Research

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Hindalco Industries
Pay-back time
Event
 In line results – though Street likely disappointed: Hindalco reported
results for FY11, which were in line with our estimates operationally after
adjusting for one-offs. Hindalco’s subsidiary Novelis has returned
USD$658mn of capital (initial equity investment of USD$3.55bn). Also, with
the restructuring of the Novelis debt, we expect regular dividend payouts. We
maintain Outperform and TP.

Impact
 Results on an improving trend: Net sales of Rs67.6bn in 4QFY11 were
up 24% YoY, driven by strength in aluminium and copper prices.
Aluminium division’s PBIT at Rs5.6bn, was down 8.4% YoY, impacted by
higher costs, though the copper division reported PBIT of Rs2.1bn, up
61% YoY. PAT at Rs708mn was up 7% YoY and 54% QoQ.
 Aluminium Division– to be driven by volume growth: While we expect
costs to rise by almost USD$100/t on account of increased linkage coal price
by Coal India, this should be compensated by higher LME price, currently
USD$2,600/t, compared to FY11 (Mar 2011 ending) average price of
USD$2,249/t. We are building in a recovery in production plus 10% increase
owing to commissioning of Mahan smelter.
 Copper division – expect better profitability: Tc/Rc’s for 2011 have been
settled at 20% higher rates compared to 2010, led by surplus in concentrate
market. Also, by-product prices continue to be strong and should add to
profitability of this division.
 Expansions well financed with long-duration debt: Hindalco achieved
financial closure for two of its projects during the quarter: 0.4mt Mahan
smelter and 1.5mt Utkal refinery. These have been financed by long-dated
debt with a tenure of more than 12 years. However, the key concern is
approval of Mahan coal block, which has been stuck in the No Go area. If
delayed further, this could distort the profitability of this smelter.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs280.00 based on a PER methodology.
 Catalyst: Further price increases by Novelis and strength in Aluminium prices
Action and recommendation
 Maintain Outperform: In our view, Hindalco is 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,
provide a good buffer while its low-cost Indian operations provide leverage to
rising aluminium prices. Maintain Outperform.