Hindalco Industries - Nirmal Bang

Novelis: Yet Another Dismal Quarter

Novelis's 4QFY12 adjusted EBITDA was 14% below our estimate following 7% lower volume and 8% lower EBITDA/tn compared to our expectations. On YoY basis, it reported a 8% drop in volume at 738,000tn, which coupled with a 10% drop in EBITDA/tn to US$316, resulted in a 17% decline in adjusted EBITDA at US$233mn. However, the performance remained respectable on QoQ basis due to seasonal weakness in 3QFY12. Nonetheless, we have not revised our volume and EBITDA estimates as we were already factoring in a subdued scenario. We have incorporated the latest balance sheet which coupled with higher capex guidance compared to our previous estimate led to a 3% cut in our target price to Rs107 (earlier TP Rs111) while retaining our Sell rating on Hindalco.

Region-wise highlights: In terms of region-wise performance, shipments dropped across regions except South America on YoY basis. On QoQ basis, the European region registered highest growth of 17% in shipments. In terms of profitability, Asia and South America regions witnessed severe pressure due to subdued demand as well as a drop in realisation. The European region, on the back of strong volume, was the only one to report QoQ improvement in profitability. North America region's profitability showed stable-to-downward bias during the quarter.

Management's guidance: The company has given guidance of US$600-700mn of free cash flow in FY13E, while capex is likely to be US$650-700mn in the same period. Novelis expects adjusted FY13 EBITDA to be higher than FY12 adjusted EBITDA of US$1.05bn. We would like to highlight that the company had given adjusted EBITDA guidance of US$1.15-1.20bn at the beginning of FY12, which was subsequently revised after 2QFY12 and 3QFY12 results. Our adjusted FY13 EBITDA estimate stands at US$937mn. The company has also indicated that free cash flow is likely to be negative during 1QFY13 due to interest payment, front loaded capex and higher working capital requirement.

Project status and other highlights: The company maintained its earlier guidance of commissioning first phase of Brazil expansion in 4QFY13, while the rest of the projects are expected to start operations by the end of FY14. It achieved free cash flow of US$318mn during 4QFY12, compared to US$236mn in the corresponding quarter a year ago. For FY12, the company generated free cash flow of US$614mn, which was in line with its guidance of US$600-700mn given at the beginning of the year. Capex during 4QFY12 and FY12 stood at US$219mn and US$516mn, respectively, but is marginally lower than the guidance of US$550-600mn given at the beginning of FY12.

Source : Equity Bulls

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