Buy Hindalco Industries - Motilal Oswal

Hindalco's 3QFY11 (HNDL IN, Mkt Cap US$9.3b, CMP211, Buy)

Net Sales increased 2% QoQ to Rs59.7b (+9% YoY) due to strong LME prices. Aluminum production increased 10% QoQ to 136ktons. Segmental EBIT of Aluminium segment increased 4% QoQ (+6% YoY) to Rs4.65b. Adjusted PAT increased 1% QoQ to Rs4.6b, due to cost escalation of Rs1b on account of disruption of production at smelters (Hirakud and Dahej).

Hindalco has delayed the commissioning schedule of 1.5mtpa Alumina refinery by almost 6 months 87% of project cost is committed Hindalco has also delayed the commissioning schedule of Aditya and Jharkhand projects by 12-18 months. Gains on account of stronger LME are getting eroded by persisting cost pressure for aluminum smelter in India. Hindalco has strong pipe line of aluminium and alumina projects, but execution delays remains risk to our volume assumption.

Novelis has returned US$1.7b as return of Capital to Hindalco, which has been utilized to repay acquisition debt. Consolidated interest expense for FY12 has increased by Rs3.7b due to increase of debt at Novelis level. We cut FY11 EPS by 9% to model below estimate 3QFY11 results for both standalone and Novelis. We have cut our volume assumptions of alumina and metal for FY12 and FY13 to incorporate delay in commissioning of projects. As a result, we cut our EPS estimates by 6% to Rs18.3 for FY12 and 5% to Rs20 for FY13. Stock trades at a PE of 11.5x FY12 and EV/EBITDA of 6.4x FY12. Maintain Buy.

Source : Equity Bulls

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