Hindalco Industries - Domestic business on track, Novelis to rebound - Religare

Novelis' Q3FY13 results were slightly below estimates due to lower sales volumes post ERP implementation and higher pricing pressure, particularly in Asia. We expect Novelis' profitability to improve in FY14 on incremental production, higher scrap benefits and an increasing automotive share. HNDL's standalone copper business is also expected to do well while the aluminium business will derive benefits from the new Mahan smelter. Higher start-up costs will, however, weigh on profitability in FY14. Maintain HOLD.

- Novelis' sales volumes down on ERP implementation: Novelis' revenues came in at US$ 2.3bn (-6% YoY, -5% QoQ) with shipments flat YoY at 647kt (-10% QoQ). Shipments were up across all regions expect North America (-14% QoQ) on account of ERP implementation there.

- Adj. EBITDA further hit by pricing pressure: Novelis' EBITDA came in at US$ 185mn (-13% YoY,-33% QoQ) with adj. EBITDA/t at US$ 286/t (-13% YoY, -25% QoQ) due to lower volumes coupled with pricing pressure in Asia from higher Chinese competition.

- Standalone operations in line: Standalone revenues came in at Rs 68.7bn (+3% YoY, +12% QoQ) led by higher aluminium volumes (7% ahead of our estimates). EBITDA stood at Rs 5.8bn (-19% YoY, +13% QoQ) as profitability of Al business improved while adjusted PAT came in at Rs 4.3bn (-4% YoY).

- Expect Novelis' performance to improve: We expect Novelis to improve in FY14 (EBITDA estimate of US$ 1.2bn) with 100kt of incremental production, higher scrap benefits and an increasing automotive share in revenues.

- Maintain HOLD: We expect the Novelis and copper businesses to do well while aluminium operations should derive benefits from the Mahan smelter. However, profitability will remain muted given Mahan/Utkal start-up costs in FY14. Maintain HOLD with a March'14 TP of Rs 130 based on 6x FY15E EV/EBITDA.

Source : Equity Bulls

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