Hindalco Industries - Uncertainties loom large; Hold - Anand Rathi

Hindalco Industries' (Hindalco) 2QFY13 results for both standalone and Novelis operations were a non event, in line with our estimates. India operation continues to reel under high cost inflation, while Novelis is stable with an uncertain outlook. We maintain Hold, as any possible re-rating is capped by likely delay in India expansion.

Costs in India unabated. Facility disruptions had hit Hindalco's India operations in 1QFY13. So, the company continued to ramp up these in 2QFY13, with visible sequential improvement. Revenues, at Rs.61bn, were higher qoq, led by better volumes in both copper and aluminium segments. EBITDA was at Rs.5.2bn. Other income and finance costs were, however, low due to debt repayment while tax rate was high at 20%.

Stable Novelis operations. Novelis reported stable operations with adjusted EBITDA of US$277m, down 8%YoY, primarily due to higher employment and project start-up costs associated with its expansions. Flat rolled volumes of 719kt were owing to weakness in European operations and delivered EBITDA/tn of US$367, in line with full year estimates of US$350/tn.

Uncertain outlook. Novelis has guided that slowing global economy and intensified competition could hit 2HFY13, while India operations will continue to battle high input costs (although partly offset by product value addition). India expansion might get slightly delayed while Novelis expansion is on track.

Valuations. We have valued the stock on SOTP, with Novelis valued at 6.8x EV/EBITDA (lower than 7x earlier to factor slower growth) and India operations at 6xEV/EBITDA providing target price of Rs.125. Risks. Adverse regulatory policies and drop in aluminium prices.

Source : Equity Bulls

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