Hindalco: 2Q11 results below estimates : HSBC

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Hindalco (HNDL IN)
OW(V): 2Q11 results below estimates but unlikely to
impact full-year numbers
 2Q EBITDA c13% below expectations but unlikely to impact
our full-year estimates
 Brownfield projects delayed by a quarter, greenfield projects
running a quarter ahead
 Maintain OW(V) and TP of INR260;





2Q below expectations, but unlikely to hurt full-year estimates :
 Adjusted EBITDA was INR7.2bn, up c48% y-o-y, but c13% below our estimate as
lower aluminium volumes, higher power costs and lower copper TCs hurt margins
 Revenues were INR58.6bn, up c18% y-o-y due to higher commodity prices, higher
alumina/copper volumes and despite the stronger rupee.
 Unlike to impact our full-year estimates as lower aluminium volumes were due to
pot outage caused by heavy rains – an insurance policy will cover property damage
and business interruptions – and there is a compensatory effect from higher-thanexpected
aluminium prices and stronger copper volumes than previously expected.

Projects update:
 Brownfield projects: Hirakud smelter expansion phase-1 (6ktpa) and phase-2
(19.5ktpa) are running with a one-quarter delay vs. our expectations.
 Greenfield projects: Utkal refinery (1.5mt) and Mahan smelter (0.36mt) are running
a quarter ahead of our expectations.

We value Hindalco based on FY12e EV/EBITDA, with multiples of 7.0x for its
standalone entity and other JVs and 8.0x for Novelis. Accordingly, we arrive at a target
price of INR260 and rate the stock OW(V). Lower-than-expected aluminium prices,
copper TC/RCs and operational performance at Novelis are downside risks. Also, given
the scale and scope of expansion projects, timely execution is critical.