Hindalco Industries-- All eyes on expansions :: Macquarie Research,

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Hindalco Industries
All eyes on expansions
Event
 Results above estimates: Hindalco reported results for 1Q FY12, which
were marginally above our estimates on lower than expected increase in
costs. Current operations remain stable and all eyes are on expansion
projects both from completion date and cost over-run point of view.
Management has largely maintained its guidance here.  We maintain
Outperform and TP.
Impact
 Strong results – despite lower production: Net sales of Rs60bn is up 16%
YoY driven by strength in aluminium and copper prices. Aluminium division’s
PBIT at Rs6bn, was up 8.5% YoY, with costs eating into higher aluminium
realisation. Copper division reported PBIT of Rs1.5bn, up 17% YoY despite
lower production due to bi-annual shutdown. PAT at Rs6.4bn is up 20% YoY
helped by higher other income.
 Aluminium Division- can face some pressure: With aluminium price
reducing below our assumption of US$2535/t for FY12, we expect some
pressure on earnings. For every 10% decrease, the earnings reduce by 14%.
We do expect some volume growth from completion of Hirakud smelter
expansion, and possibly Mahan smelter coming on line in 2
nd
half.
 Copper division – expect better profitability: Tc/Rc’s for 2011 have been
settled at 20% higher rates as compared to 2010, led by surplus in
concentrate market. Falling copper prices reduce working capital requirement
but benefit is negated due to lower earnings on free metal. Volume should
increase as smelters are back in operation following bi-annual maintenance
shutdown.
 Expansions largely on track: Hindalco has maintained that 0.4mt Mahan
aluminium smelter will be commissioned starting this year, while its 1.5mt
Utkal alumina refinery is now more specifically mentioned starting in 2
nd
half
2012 against earlier guidance of just 2012. While management does mention
inflationary pressure on project costs, but no increase has been done to
estimates as yet.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs270.00 based on a PER methodology.
 Catalyst: Further price increases by Novelis and strength in Aluminium prices
Action and recommendation
 Maintain Outperform: Hindalco is the best aluminium play in the region in
our view. Stable earnings from Novelis which is 60% of earnings; provide a
great buffer while its low cost Indian operations provide the leverage to rising
aluminium prices. Maintain Outperform.