Hindalco Industries : 2QFY11 results broadly in line: JPMorgan

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Hindalco Industries Underweight
HALC.BO, HNDL IN
Novelis: 2QFY11 results broadly in line


• 2Q FY11 broadly in line with estimates, although it benefited from
FX gains: Novelis reported adjusted EBITDA of $290MM (+10% q/q;
+45% y/y) compared to adjusted EBITDA of $263MM in 1Q. However,
adjusted EBITDA benefited from a $20MM positive impact on forex
compared to $23MM negative forex in 1Q FY11. 1H FY11 adjusted
EBITDA stood at $553MM and the unit is on track to achieve the $1B
adjusted EBITDA guidance given for FY11E. Total shipments in the
quarter were 767kt, down 2% q/q due to sharply lower shipments in Asia
(-9% q/q), which were affected by a 12-day strike in Korea leading to
the loss of shipments of 10kt. Novelis expects to fully recover the lost
volume in 2H FY11. European volumes were +12% y/y, driven by the
continued strong auto market. 3Q shipments will be lower given the
seasonal slowdown.



• Optimizing and growing capacity: The company is currently operating
at capacity in all regions and will release capacity in FY11 with the
closure of its Bridgenorth plant in Europe. This high-cost facility served
the foil market, and the closure will lead to cost savings of $15MM. The
company will look at utilizing the capacity to increase production of
higher-margins products such as cans. Novelis will also increase capacity
by 3-4% annually over the next few years through de-bottlenecking. The
company pointed out that the capex required for this would be minimal
(<$80MM). The company sees capacity cumulatively increasing by 20%
by FY14, after de-bottlenecking and expansion in Brazil. Capex in 1H
FY11 was $71MM (up from $46MM in 1H FY10) and capex guidance
of $250MM was reiterated for FY11, which will remain back-endweighted
given that capex was deferred in 1H to meet strong demand.

• Liquidity position remains strong to support strategic capital
allocation: Strong FCF ($209MM in 1H FY11 excluding the change in
financing of working capital) and continued strength in its business
should help the company achieve its FY11 target of surpassing last
year’s FCF of $355MM. The company highlighted that with improving
liquidity ($1.2B in 2Q) it would focus on more strategic decisions about
capital allocation.

• Growing the higher-margin product portfolio: Novelis highlighted its
focus on increasing the penetration of higher-margin products (such as
cans, automobiles and electrical) in its portfolio. Novelis expects strong
growth in these segments driven by strong demand in Asia and South
America and recovery in NA and Europe. Higher-margin premium
products accounted for ~63% of its basket in FY10.