Hindalco - 3QFY17 Result Update - Strong Performance Continues; Valuation Pricey - Reliance Securities

Operating profit of Hindalco Industries grew by 76% YoY and 3% QoQ to Rs11.9bn, largely in-line with our estimate of Rs12.1bn. Aluminium revenue rose by 8.6% YoY (flat on sequential comparison) on higher volume. Segmental EBITDA margin rose by 10% YoY and 1.43% QoQ to multi-year high of 17.8% largely due to stabilization of new smelters and higher volume. Copper revenue rose by 19% YoY (+8% QoQ) due to 8% YoY and 11% QoQ rise in LME copper prices despite flat YoY volume (-11% QoQ) due to a planned operation shutdown at one of its copper units. However, copper margins declined by 1.3% QoQ and 1.81% YoY due to lower acid realization. Looking ahead, we believe that aluminium volume will continue to increase on YoY comparison with optimum capacity ramp-up in Greenfield units. Further, lower cost of input and cost-saving measures augurs well for Hindalco. However, as the recent run-up in stock caps any further upside from current level, we maintain our REDUCE recommendation with a revised Target Price of Rs138.

Volumes Continue to Remain High

Aluminium and Alumina volumes rose by 5.5% YoY and 8% YoY respectively as new Greenfield facilities are now operating at optimum capacity. However, Aluminium volumes remained sequentially flat at 320,000 tonne (our estimate 310,000 tonne) since ramp-up at Mahan and Aditya Smelters is complete. Aluminium revenue rose by 8.6% YoY and (flat QoQ) despite LME prices rising by 14.4% YoY and 5.6% QoQ as Hindalco sold only 310,000 tonne out of its 320,000 tonne of production due to bottleneck issues at the port and the same was sold in the first week of Jan'17. Alumina production including that at Utkal rose by 6% YoY and 3% QoQ to 744,000 tonne on the back of ramp-up of the Utkal refinery, which also now operates at designed capacity.

Outlook & Valuation

We believe that the stock has run ahead of fundamentals while outperforming its global peers. Also, as per our understanding, the current stock price does not capture LME price risk, though the overall cost is likely to remain stable, Novelis (its US arm) being a bright spot and steady copper earnings in India. Further, with additional power subsidies of US$200/tonne announced by China, there is a risk of ~3mnT capacity to come on-stream in China alone and could put pressure on LME prices. At the CMP, the stock trades at 8xFY18E EV/EBITDA. We maintain our REDUCE recommendation on the stock with a revised SOTP-based Target Price of Rs138.

Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.187.35 as compared to the previous close of Rs. 184.5. The total number of shares traded during the day was 666974 in over 4801 trades.

The stock hit an intraday high of Rs. 188.6 and intraday low of 182.45. The net turnover during the day was Rs. 123633021.

Source : Equity Bulls

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