Hindalco Industries: Other Income drives PAT beat; interesting update on Mahan:: JPMorgan,

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 PAT beat driven by higher Other Income; EBITDA broadly in line: HNDL
reported Q1FY12 PAT at Rs6.44bn (+2% q/q, +19% y/y) vs. JPMe at Rs5.8bn
and BBRG estimates at Rs6.1bn. The PAT beat was driven by higher Other
Income, which came in at Rs1.8bn vs. our estimates of Rs1bn. EBITDA at
Rs8.7bn was broadly in line with our estimates of Rs8.4bn. Given the sharp fall
in HNDL’s stock price (14% in the last one month), we believe the headline
PAT beat could provide some near-term relief to the stock price.
 Segment update - Surprisingly strong Aluminum margins: Aluminum PBIT
margins surprisingly moved up 320bps q/q to 28.6%, even as LME aluminum
prices moved up only 4% q/q and the company saw the full impact of Coal
India’s 30% coal price increase. We attribute the better showing in the
aluminum segment to higher premiums, given higher sales in the domestic
market. Aluminum EBIT at Rs6bn was up 7% q/q, even as primary metal
production was up only 1% q/q. Alumina production was impacted, given
bauxite availability issues at Renukoot. Copper EBIT stood at Rs1.4bn, down
29% q/q, given 14% lower copper cathode production. HNDL commented that
‘Downstream sales were lower due to sluggish demand.’ Weak FRP demand
could impact Value Added Product sales going forward.
 Capex update: Capital Employed in the Aluminum business increased by
Rs15bn q/q. While it is difficult to attribute the amounts to capex and to working
capital specifically, we are enthused by the increase. On a y/y basis, the capital
employed in the Aluminum business is up Rs60bn, implying that capex has
picked up materially over the last 3-4 quarters. While in the last project update
at end May HNDL had stated 2012 as a start date for Utkal (alumina refinery), it
has given a more specific timeline now, with Utkal started in H2 2012. Mahan
(aluminum smelter) timeline remains the same at end 2011 (First Metal), though
Utkal, in our view, remains the all-important project.
 Interesting updates on Mahan, overall regulatory environment: HNDL in its
release highlighted that on Mahan Coal, HNDL has made detailed presentations
and also applied for tapering linkages ‘and is also exploring open market
purchases and imports to meet any shortfall until a satisfactory resolution of
the matter.' HNDL also highlighted that ‘Given the changes that may be
involved in the approval and coal sourcing pattern, the scope and cost of the
project may undergo some modifications.’ This, in our view, indicates that
while Mahan is on track, CoP is likely to be sharply higher on coal issues.
 Company also highlights the regulatory pressures: So far, HNDL has been
relatively immune to the regulatory pressures that have impacted India’s mining
sector. However, given the issues faced in Mahan, HNDL highlighted that ‘Of
late, the uncertainty in the regulatory environment has impacted the progress
of some of these projects and has posed challenges with respect to the
commissioning of these projects as per schedule.’