Hindalco Industries:: JPMorgan

In our view, the current stock price of HNDL is only pricing in Novelis
(downstream subsidiary, 100% owned) and a part of the current India
business in FY14E and not even Novelis in FY15E. With project
commissioning on the way and India ally recovery (as production
stabilizes), we expect the sharp discount to our fair value estimate to
narrow. Admittedly, reported earnings for the standalone business would
be under pressure given higher capital costs as projects start flowing
through the P&L, however, cash earnings should pick up as the projects
deliver positive EBITDA. HNDL remains among our top picks in India
and we remain OW with a PT of Rs160, implying ~50% upside
potential.
 Novelis - Adjusted EBITDA impacted by one-time expenses: Novelis, the
downstream subsidiary (100% owned by HNDL), reported weak numbers with
adjusted EBITDA at $185mn, down 13% y/y, while adjusted EBITDA stood at
$267/T, down 15% y/y and 27% q/q. Results were impacted by Enterprise
Resource Planning (ERP) implantation issues. As per the company, Q3 impact
due to ERP was $39mn ($19mn in lost volumes and $20mn in start-up cost).
Adjusted for the impact, EBITDA/T stood at $323/T, up marginally y/y.
Production has now normalized, though the company does see some
incremental costs in North America in Q4 and pricing pressure in some
markets. We adjust our FY13 estimates to reflect the one-time costs. Excluding
North America, volumes increased y/y across all other regions, with South
America reporting multi-quarter high volume sales. Net debt increased
modestly to $4.5bn. The company expects Q4 EBITDA to be higher y/y.
 Brazil expansion commissioned; Capex for FY13E increased to $750mn: In
our view, Novelis is likely to see the benefits from the capex done over the last
2-3 years. The Pinda facility in Brazil was commissioned in Dec-12 ($325mn
investment). The capex for FY13E has been increased to $750mn.
 HNDL - See large upside with catalysts around the corner: We value HNDL
on FY14E and on our numbers the existing India + Novelis comes to
Rs123/share. Given that we think Novelis is likely to see EBITDA growth
driven by higher volumes, our FY15E Novelis/share value stands at Rs116
(6.5x EV/EBITDA for $1.3bn EBITDA, where we see upside). While
investors are worried about the sharp increase in reported interest and
depreciation costs (from new capacity commissioning), in our view, cash
earnings should go up as EBITDA>interest. We believe the three key catalysts
for re-rating in FY14E are: a) start of bauxite mining; b) India ally recovery; c)
Novelis ramp up of volumes. Key risks include large delays in Utkal refinery
commissioning.

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