Hindalo Industries - Result Update - Strong show becoming a routine, maintain Buy - Centrum

We reiterate our conviction buy on Hindalco (HNDL) with a revised TP of Rs230. HNDL continued to deliver superlative operational performance from domestic aluminium business (EBITDA/t at US$418) led by industry leading cost positioning and optimum utilisations, while Novelis' performance improved materially and was best ever since Q2FY12 (EBITDA/t at US$370). We like HNDL on account of i) strong earnings visibility from low cost aluminium asset base with favourable coal supply secured, ii) increased EBITDA contribution from Novelis, iii) strong capex discipline resulting in high FCF generation and iv) relentless focus on reducing Net debt/EBITDA through material deleveraging over FY18-19E.

- Strong performance at aluminium operations continues; copper shines: Standalone EBITDA at Rs13.5bn, was marginally above our estimates, led by strong performance of the aluminium division and solid growth in the copper division. The aluminium division reported EBITDA of Rs9.2bn (up 78% YoY) and blended EBITDA/t of ~US$418/t (vs US$340/t YoY). The aluminium business benefitted from higher LME and largely stable coal costs. The copper division reported solid operational performance with volumes of 114kt and EBITDA of Rs5bn, up 32% YoY.

- Novelis operations continue to deliver steady performance: Novelis continued its strong performance led by higher automotive volumes and adjusted EBITDA/t (excluding metal lag) stood at US$370 (up ~5% YoY and best ever since Q2FY12). EBITDA/t was driven by operational efficiencies and a better product mix and guidance for FY18E was given at US$350-360/t led by further ramp-up of automotive capacity over the next two years.

- Outlook - solid cost positioning to keep operational performance strong: HNDL's overall aluminium portfolio CoP stands at the 11th percentile in the global cost curve led by sharp cost reduction in several previous quarters and improving coal availability scenario (~70% of coal requirement tied up through captive/linkage) at competitive costs. LME prices have improved in the last few months led by better demand-supply situation, a rising global cost curve and expectations of production cut in China due to environmental concerns. Management focus on driving further cost savings, increasing downstream volumes (~15% CAGR over next few years) and deleveraging the balance sheet remains intense. We adjust our earnings estimates marginally and revise our cons. EBITDA lower by 1.6%/2.4% for FY17E/18E.

Valuation and risks - maintain Buy: We have maintained a high-conviction Buy on Hindalco (since our upgrade in Sep'15), and despite strong stock performance in the last one year, we believe that valuations are not stretched considering the solid operational performance and reduced capex which would aid in material balance sheet deleveraging over FY18-19E with net debt reduction of ~Rs100bn+. Stock trades at FY19E EV/EBITDA of 5.7x on consolidated earnings. We maintain our EV/EBITDA multiple at 6.5x and factor in dilution impact of recent QIP to arrive at a revised TP of Rs230. Maintain Buy and retain HNDL as our top large cap pick in Metals. Key downside risks are lower LME prices and lower volumes.

Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.202.1 as compared to the previous close of Rs. 198.45. The total number of shares traded during the day was 841567 in over 4398 trades.

The stock hit an intraday high of Rs. 202.8 and intraday low of 196.4. The net turnover during the day was Rs. 168262290.

Source : Equity Bulls

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