Operational resilience seen; high debt a key concern
Hindalco’s standalone performance was above expectations with PAT at RSs4.8bn (up 11% QoQ and higher than our estimates by 12%). EBITDA stood at ~Rs6.4bn (margin of ~9.2%, up 70bps QoQ). Better value added product sales coupled with operational efficiencies led to 10.5% QoQ improvement in EBITDA despite flat LME realizations. Commissioning of Mahan and Utkal projects have started which is expected to drive volume growth and FRP commissioning at Hirakud is expected to result in higher VAP share in aluminium business. We remain positive on the recovery in LME prices going ahead and revise our estimates marginally to account for higher debt on books. Maintain buy.
Volumes improve marginally QoQ but VAP share increases: Aluminium production stood at 142kt, up 2% QoQ and copper production at ~85kt was up 1% QoQ. VAP share in production went up smartly from 43% in FY12 to 47% in FY13 and VAP volumes stood at 255kt in FY13 (up 4.5%). Alumina sales were up 4% YoY to 281kt in FY13.
EBIT improves for both aluminium and copper divisions: EBIT for aluminium division went up by 37% QoQ to Rs2.8bn despite flat realizations on account of higher VAP share and operational efficiencies. EBIT for copper division also increased by ~15% QoQ to ~Rs2.6bn (EBIT margin of 5.6%, up 80bps QoQ).
EBITDA margin improves sequentially: Operational efficiencies and increase in value added product share led to improvement of standalone margin to 9.2% (up 70bps QoQ). Margin for FY13 stood at 8.5% in a tough operational year marked by lower realizations and higher raw material and coal costs.
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Hindalco’s standalone performance was above expectations with PAT at RSs4.8bn (up 11% QoQ and higher than our estimates by 12%). EBITDA stood at ~Rs6.4bn (margin of ~9.2%, up 70bps QoQ). Better value added product sales coupled with operational efficiencies led to 10.5% QoQ improvement in EBITDA despite flat LME realizations. Commissioning of Mahan and Utkal projects have started which is expected to drive volume growth and FRP commissioning at Hirakud is expected to result in higher VAP share in aluminium business. We remain positive on the recovery in LME prices going ahead and revise our estimates marginally to account for higher debt on books. Maintain buy.
Volumes improve marginally QoQ but VAP share increases: Aluminium production stood at 142kt, up 2% QoQ and copper production at ~85kt was up 1% QoQ. VAP share in production went up smartly from 43% in FY12 to 47% in FY13 and VAP volumes stood at 255kt in FY13 (up 4.5%). Alumina sales were up 4% YoY to 281kt in FY13.
EBIT improves for both aluminium and copper divisions: EBIT for aluminium division went up by 37% QoQ to Rs2.8bn despite flat realizations on account of higher VAP share and operational efficiencies. EBIT for copper division also increased by ~15% QoQ to ~Rs2.6bn (EBIT margin of 5.6%, up 80bps QoQ).
EBITDA margin improves sequentially: Operational efficiencies and increase in value added product share led to improvement of standalone margin to 9.2% (up 70bps QoQ). Margin for FY13 stood at 8.5% in a tough operational year marked by lower realizations and higher raw material and coal costs.
Novelis reported sequentially better earnings: Novelis adjusted EBITDA for Q4 stood at US$240mn, up 3% YoY and ~30% QoQ. Sequential improvement on account of cost control and scrap benefits. Rolled products shipments stood at 698kt, flat YoY but higher by ~8% QoQ led by higher volumes in Asia and South America. Net Income stood at US$59mn and free cash flow before capex of US$175mn.
Outlook and earnings revision: Hindalco has started the commissioning of its Greenfield projects with first metal tapping at Mahan in Apr’13 and first bauxite charging at Utkal in May’13. Commissioning of rolling facility and expansion at Hirakud is also being started in stages. Capex at standalone operations stood at ~Rs80bn and Novelis spent ~US$775mn on capex in FY13. As a result, consolidated debt has increased to Rs560bn in FY13 from ~Rs410bn in FY12. We have maintained our volume estimates largely for domestic aluminium business (with 350kt alumina volumes from Utkal and 70kt metal volumes from Mahan in FY14E) but increased our VAP product share for aluminium. We revise our FY14E/15E EBITDA by 1.3%/2.1%. We continue to maintain our view of rebound in LME prices and revise our LME Al assumptions to US$2100/2200 for FY14E/15E.
Valuations – upside capped: We remain positive on the commissioning of Mahan and Utkal projects in H1FY14 which is expected to ease cash flows, release long standing CWIP and deleverage the stretched balance sheet. Hindalco currently trades at a discount to global peers and is also near its all time low on BV basis (0.5x FY15E). We value the company on SOTP basis using EV/EBITDA methodology on FY15E earnings and arrive at a fair value of Rs122. Maintain Buy.
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