Hindalco (HNDL IN) N(V): Valuations interesting, but little to get excited about  HSBC Research

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Hindalco (HNDL IN)
N(V): Valuations interesting, but little to get excited about
 Novelis adjusted EBITDA at USD233m marginally below our
estimates of USD250m; volumes surprise negatively
 NVL business might improve in FY13; but subdued
aluminium price expectations prevent us from getting bullish
 Roll forward valuations to FY14e; cut TP to INR130 (was
INR170) on lower multiples; retain N(V) rating


Novelis (HNDL’s 100%-owned subsidiary) 4Q EBITDA marginally below estimates;
volumes surprise negatively
 Shipments for 4Q fell c8% y-o-y with sharpest fall in Asia (down c18% y-o-y) as
lower electronics demand hurt volumes
 EBITDA/t increased to USD331/t for 4Q, but stayed below FY12 average of USD371/t
 Expansions are on track with Brazil (c220ktpa) commissioning by end CY12;
contracting volumes might not be easy though, in difficult end-markets
 Guidance for EBITDA and FCF before capex in FY13 was flat.
Novelis business might show signs of improvement in FY13
The management did communicate that the underlying business dynamics are improving
and that 1QFY13 results should be better than 4QFY12. However, we note that in
2HFY12, volumes have fallen 9% y-y and average EBITDA/t was lower by USD80/t
(partly explained by lower volumes) over 1H. We were also surprised that usually
considered a stable business (beverage cans) also showed decline in volumes in 2H. In
addition, Novelis did miscalculate the extent of electronics demand, following which they
had to shift mix, which impacted volumes. With that getting under control and concerns
over the external operating environment subsiding, we believe volumes and margins may
return to normal in FY13, although we do not build huge EBITDA upside vs FY12.
But, expectations of subdued aluminium prices prevent us from getting bullish
Aluminium prices have corrected 15% since the recent peak in Mar-12 and we believe
prices will continue to remain subdued over the coming quarters (for further discussion on
this, please refer to section on page 4)
Cut TP to INR130 from INR170; stay N(V) on the stock
Our TP is based on 5.5x EV/EBITDA multiple for standalone business and 6x EV/E
multiple for Novelis. HNDL now trades 0.53x FY14e book, but given the low RoCE
(c8%) for Novelis business, stability of earnings and growth in FCF is imperative for us to
keep valuing that business at 6x EV/E, which is difficult to come by in FY13 at least. We
stay N(V) on HNDL.