Hindalco Industries - Steady improvement ahead; Buy - Anand Rathi

Standalone operations still in stabilization phase. Hindalco Industries' standalone revenues would have declined 5.5% yoy, driven by lower copper volumes and metal prices. The EBITDA margin would fall 24bps yoy to 8.2%, with EBITDA of Rs. 5.3bn, due to higher power costs in aluminium smelting and the currency depreciation only partially offsetting weakness in copper smelting TcRc charges and higher by-product realisations. Higher interest costs and lower other income would lead to 23.6%, PAT decline.

Novelis can surprise. Novelis could surprise positively, with improved conversion spreads as greater demand was visible in the non-auto segments. Further, the impact related to supply-chain disruptions and adverse weather would have begun to ease.

Project guidance would be the key. Hindalco is in the midst of a massive, US$6bn, expansion in India; projects have been delayed due to regulatory clearances for inputs. Delays in projects were hampering stock performance; management guidance on this would be the key. Estimated cash flows, low IRRs from projects and further delay in expansions have led to equity dilution to bridge the shortfall.

Our take. The company has successfully integrated Novelis (globally) and now the latter commands the greater part of its market cap. The Indian operations have seen the gradual commissioning of projects, though with lower returns. Hindalco is positioned as a mining-to-end-product play with the best converter model; its improving domestic business would lead to a stock re-rating.

At the CMP, the stock trades at 8x FY15e EV/EBITDA. On a sum-of-parts basis, we value Novelis at 8x EV/EBITDA and the India operations at 8x EV/EBITDA. We maintain a Buy, with a target of Rs. 147 based on FY15e. Risks. Adverse regulatory policies and a drop in aluminium prices.

Source : Equity Bulls

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