JPMorgan::: Hindalco :: Novelis: 1Q FY12 steady in-line earnings

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Hindalco Industries Neutral
HALC.BO, HNDL IN
Novelis: 1Q FY12 steady in-line earnings


Novelis, the unlisted 100%-owned subsidiary of Hindalco, reported another strong
quarter with adjusted EBITDA of $306MM and adj EBITDA/MT of $384/MT.
Novelis highlighted that it remains on track to achieve $1.15-1.2B in adjusted
EBITDA for FY12 (JPMe at $1.22B).
 Another strong quarter: Adjusted EBITDA at $306MM was broadly in line
with our estimates and up 9% q/q (+16% y/y) while total volumes increased 2%
y/y, with rolled product volumes increasing 3% q/q. We estimate that
conversion premiums continued to inch up, with the sharpest increase, as per
our calculations, seen in Europe, followed by North America and lastly Asia.
Reported net income (a volatile metric to track on a quarterly basis given the
timing impact from derivatives) stood at $62MM for the quarter vs $50MM
each in 4Q FY11 and 1Q FY11. Net debt stood at $3.99B, higher by 5% q/q,
while FCF was a negative $127MM. Novelis attributed the semi-annual interest
payment of $106MM and higher working capital as the key items impacting
FCF in the quarter, and expects to generate $600-700MM in FCF in FY12.
Capex for the quarter stood at $67MM with full year guidance at $550-600MM
(back end weighted). Adjusted EBITDA/MT stood at $384/MT (+14% y/y,
+10% q/q) and was at the highest level since 1Q FY08 (when our data
starts). The y/y improvement of $43MM in adjusted EBITDA was driven
by $38MM of better conversion (with $19MM in higher operating costs),
$17MM in volume benefits and $28MM of FX-related benefits, of which
$14MM FX was G/L re-measurement, which were partly offset by $17MM
in higher SGA/other costs. Given that $28MM is FX-related benefit, we see
current currency volatility as something to watch.
 Key takeaways from conference call – Can demand remain strong across
regions, although we have started to see some softness in the electronics
segment? Novelis reported total rolled product volumes up 3% y/y at 767KT
with strong can volume growth in most markets, with total beverage and can
volumes increasing 9% y/y (+2% q/q) and accounting for 60% of total
rolled product volumes while non-can segments declined both on a y/y
(-5%) and q/q basis (-4%). Novelis did comment in the conference call that
it has started to see some softness in the electronics business, but expects
this to be short term. In the Electronics segment, the weakness was essentially
in Asia in the flat panel TV segments. It said Europe is seeing a shift in
packaging towards aluminum, while auto demand in Europe is essentially driven
by Asian demand. As of now Novelis highlighted that it continues to see strong
demand pull from its European customers in the Auto OEM segment, while
packaging is seeing a structural shift towards aluminum. Management attributed
the 5% y/y decline in the non-can rolled segment to a combination of strategic
shift away from certain segments and the weakness in the Asian electronics
segment. Novelis did comment that 80% volume for the year is ‘contracted/has
visibility’ with the remaining being on the spot market