Hindalco Industries Geared for the aluminium rally: RBS

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Hindalco Industries
Geared for the aluminium rally
Novelis continues to outperform and its domestic operations look well positioned
for the expected aluminium rally. Our FY11F and FY12F net earnings are now 4%
and 16% higher, respectively, after we change our volume and realisation
assumptions. Buy with a new target price of Rs287 (from Rs229).




Novelis continues to outperform
Novelis reported 2QFY11 revenues of US$2.52bn (flat qoq and up 16% yoy), in line with our
estimate of US$2.60bn. Shipments were 737kt (down 1% qoq and up 6% yoy). EBITDA was
US$290m (up 10% qoq and up 45% yoy) and higher than our estimate of US$245m.
1HFY11 EBITDA is now US$553m and looks set to exceed US$1bn for FY11F. Net income
was US$62m (up 24% qoq and down 68% yoy), in line with our estimate of US$67m. Since
the expiration of fixed ceiling contracts in December 2009, Novelis has demonstrated stable
and robust earnings over the past few quarters.

Hindalco’s Indian operations weathering the rains
2QFY11 net revenues were Rs58.6bn (up 13% qoq and up 19% yoy), driven by higher
copper production of 94.1kt (up 23% qoq and up 18% yoy). Aluminium production declined
12% sequentially to 123.3kt as a result of a production outage at the Hirakud smelter due to
heavy rains and lightning. The smelter is expected to fully stabilise by 4QFY11 and the
company is insured for the loss of volumes until then. Higher-than-expected raw material and
employee expenses drove EBITDA to Rs6.98bn (down 16% qoq and up 15% yoy).


We revisit our estimates and raise our target price to Rs287; maintain Buy

LME aluminium has recently rallied sharply and is now hovering around US$2,400/t, which
will be positive for earnings in the coming quarters. Our commodities team believes
aluminium offers one of the most attractive risk/reward commodity plays through to 2014F.
We believe Hindalco, with its expansion plans on track, is well geared to benefit from the
aluminium rally. We cut our FY11 forecast for Hindalco’s domestic aluminium volumes 4% to
519kt. We raise our average aluminium realisation assumptions by 5-11% for FY11-FY12F
(US$2,202/t and US$2,486/t, respectively). Our consolidated net earnings of Rs38.1bn in
FY11F and Rs45.6bn in FY12F are now 4% and 16% higher respectively. We raise our
SOTP-based target price to Rs287 (from Rs229) and maintain our Buy rating.