Hindalco Industries - Standalone Results Dismal, But Novelis Helps; Retain Sell - Nirmal Bang

Hindalco Industries' 1QFY13 EBITDA were 36%/38% below our/street estimates, respectively, on lower copper and aluminium production due to planned plant shutdown and temporary disruption, respectively. PAT was just 10%/17% below our/street estimates, respectively, primarily due to a significant jump in other income driven by dividend from Dahej Harbour & Infrastructure (DHIL) and higher treasury income. Novelis, on the other hand, reported steady performance with adjusted EBITDA of US$259mn compared to US$233mn in 4QFY12, while EBITDA/tn improved from US$316 to US$346 in the same period. We have cut our FY13E and FY14E EBITDA estimates by 3% and 2%, respectively, while PAT estimates have been lowered by 1% and 6% for the same period. We retain our Sell rating with revised target price of Rs103 (earlier target price Rs107).

Operational performance subdued: Alumina production was flat YoY, while it was down 3% QoQ at 335,000tn. Aluminium production was down 6% YoY and 8% QoQ at 132,000tn due to temporary disruption. Copper production was down 6% YoY and 27% QoQ due to plant maintenance shutdown. Alumina/aluminium/copper production was 1%/8%/23% below our estimate, respectively. Hindalco reported a 6% YoY drop in alumina sales to 54,373tn, while aluminium sales were down 5% YoY at 123,866tn.

Financial highlights: Hindalco reported 47%/34% YoY drop in EBITDA/PAT, respectively, due to lower production, drop in aluminium prices and higher costs. It posted 46%/34% drop in EBITDA/PAT due to the same reasons. Other income was up 69% YoY and 88% QoQ at Rs3,014mn due to Rs850mn dividend from DHIL and higher treasury income. Other expenses jumped 37% YoY and QoQ due to rise in thirdparty transportation costs and production restoration costs of aluminium and copper. The disruption in aluminium production will impact 2QFY13 performance as well.

Novelis performance update: Novelis posted a 1% QoQ jump in aluminium volume to 748,000tn, while adjusted EBITDA/tn surged 10% QoQ to US$346 resulting in an 11% QoQ rise in adjusted EBITDA to US$259mn. Volume and adjusted EBITDA/tn were down 6% and 10% YoY, respectively, resulting in a 15% YoY drop in adjusted EBITDA.

Novelis guidance: The management has maintained guidance of US$600-700mn of free cash flow (FCF) before capex for FY13E, while capex is set to be US$650-700mn for the same period. At the 4QFY12 results con-call, Novelis had indicated negative FCF for 1QFY13. FCF stood at negative US$2mn for 1QFY13 due to interest payment and higher inventory build-up, while capex stood at US$167mn for the quarter.

Change in earnings estimates

We have cut our standalone EBITDA by 17% and 10% for FY13E and FY14E, respectively, primarily on account of lower aluminium volume and higher costs, which resulted in 15% and 20% cut in PAT estimates for the same period. However, at the same time, we have increased our Novelis' EBITDA/tn estimates by 8% and 2% for FY13E and FY14E, respectively, after a strong performance in 1QFY13. On a consolidated basis, the above factors resulted in 3% and 2% drop in EBITDA for FY13E and FY14E respectively, while we have downgraded PAT estimates by 1% and 6% for the same period. PAT drop estimate for FY13 is lower than the EBITDA drop due to higher other income, lower interest costs and depreciation due to delay in commissioning of Mahan aluminium plant.

Source : Equity Bulls

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