Hindalco Industries (HNDL) Earnings to remain under pressure in Q2: Kim

Hindalco Industries (HNDL)
Earnings to remain under pressure in Q2


Q1 EBITDA declined 9% QoQ to Rs19bn. Last quarter, HNDL’s domestic
business suffered due to falling metal EBITDA (aluminum -33% QoQ,
copper -56% QoQ). We think Q2 performance may not be different because:
1) aluminum prices have reduced 6% since July and, 2) the local Pollution
Control Board (PCB) asked HNDL to shut down its power plants at the
Hirakud aluminum plant. We forecast profit to decline 10% QoQ in Q2 and
15% for full-year FY13. We maintain SELL on HNDL given risks to the
domestic earnings that accounts for 70% of total profit. The share price may
fall below our TP if HNDL’s power plants are shut for a longer period.

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Aluminum business under pressure due to weak metal prices. The
aluminum plants in India contribute 55% to HNDL’s profit. We forecast Q2
EBITDA to decline 15% QoQ to US$482/ton because of the recent fall in
aluminum prices. This is after the cushion from INR weakness. The Canadian
aluminum packaging unit (Novelis) will not benefit from low prices as it will
have to pass them on to its customers.
Power cost would rise because of the recent shut down. The Odisha
State PCB asked HNDL to shut down its power units at its Hirakud smelter
following a breach of its ash pond, which has damaged crops in nearby areas.
Reportedly, HNDL has shut down the 367MW power units with immediate
effect. Though HNDL has been allowed to draw power from the grid in order
to run the smelter, it will increase overall cost for aluminum business by 5%.
Q2 net profit to decline 10% QoQ. We forecast Q2 EPS of Rs4.3 (-10%
QoQ). Given the high level of uncertainty surrounding Europe and North
America in near term, there is risk to sustainability of Novelis’ EBITDA, which
had increased 8% to US$359/ton QoQ in Q1,.
Maintain SELL on the stock. We maintain SELL on HNDL because of high
risk to earnings from declining aluminum prices. Y-T-D, the stock
underperformed the SENSEX by 20% because of declining profit. We fear that
pressure on metal prices will continue thru FY13 as China GDP growth is
slowing down.