Kim Eng maintains Sell on Hindalco Industries

Earnings to remain under pressure in Q2

Q1 EBITDA declined 9% QoQ to Rs19bn. Last quarter, HNDL's domestic business suffered due to falling metal EBITDA (aluminum -33% QoQ, copper -56% QoQ). We think Q2 performance may not be different because: 1) aluminum prices have reduced 6% since July and, 2) the local Pollution Control Board (PCB) asked HNDL to shut down its power plants at the Hirakud aluminum plant. We forecast profit to decline 10% QoQ in Q2 and 15% for full-year FY13. We maintain SELL on HNDL given risks to the domestic earnings that accounts for 70% of total profit. The share price may fall below our TP if HNDL's power plants are shut for a longer period.

Aluminum business under pressure due to weak metal prices. The aluminum plants in India contribute 55% to HNDL's profit. We forecast Q2 EBITDA to decline 15% QoQ to US$482/ton because of the recent fall in aluminum prices. This is after the cushion from INR weakness. The Canadian aluminum packaging unit (Novelis) will not benefit from low prices as it will have to pass them on to its customers.

Power cost would rise because of the recent shut down. The Odisha State PCB asked HNDL to shut down its power units at its Hirakud smelter following a breach of its ash pond, which has damaged crops in nearby areas. Reportedly, HNDL has shut down the 367MW power units with immediate effect. Though HNDL has been allowed to draw power from the grid in order to run the smelter, it will increase overall cost for aluminum business by 5%.

Q2 net profit to decline 10% QoQ. We forecast Q2 EPS of Rs4.3 (-10% QoQ). Given the high level of uncertainty surrounding Europe and North America in near term, there is risk to sustainability of Novelis' EBITDA, which had increased 8% to US$359/ton QoQ in Q1.

Maintain SELL on the stock. We maintain SELL on HNDL because of high risk to earnings from declining aluminum prices. Y-T-D, the stock underperformed the SENSEX by 20% because of declining profit. We fear that pressure on metal prices will continue thru FY13 as China GDP growth is slowing down.

Source : Equity Bulls

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