Hindalco Industries (Q1 FY13)

CMP Rs120, Target Rs147, Upside 22.3% 

• Q4 FY12 standalone revenue of Rs60bn was quite lower than our estimate of Rs70bn. The underperformance was due to lower copper and aluminium production.
• Copper production declined 27.4% qoq due to maintenance shutdown. EBIT from the division plunged 74% qoq to 0.8bn.
• Aluminium production too was impacted due to some operational issues at both its smelter. EBIT declined 44.2% qoq to 2.7bn
• Operating profit of Rs4.6bn was 46.4% lower on a qoq basis due to a sharp increase in other expenditure
• Other income of Rs3bn was quite higher due to dividends received from its subsidiaries
• Novelis numbers showed recovery on a qoq basis, both in volumes and margin
• We maintain our BUY rating on Hindalco with a revised 9-month price target of Rs147

Lower production led to an underperformance in topline

Hindalco in Q1 FY13 registered revenues of Rs60bn, quite lower than our estimate of Rs70bn, on account of lower copper and aluminium production. Copper division revenue was lower by 22.9% qoq to Rs39bn due a 27.4% decline in copper production and lower byproduct revenue. Copper production declined sharply in Q1 FY13 after registering its all time high quarterly production in Q4 FY12 as the company had taken maintenance shutdown. We are surprised by the shutdown as the company had taken its bi-annual shutdown in Q2 FY12. Aluminium division revenue too was lower by 17.5% qoq on account of lower aluminium production and lower product premiums. Aluminium metal production decreased by 8.3% qoq to 132,000 tons from 144,000 tons in Q4 FY12. The decline in aluminium production was due to operational issues in both the smelters. Alumina production during the quarter too was lower by 2.9% qoq to 335,000 tons.

Operating profit plunged 46.4% qoq due to lower production and jump in other expenditure

In Q1 FY13, Hindalco’s operating profit declined sharply by 46.4% on a qoq basis and lower by 46.6% on a yoy basis. Operating profit for the quarter stood at Rs4.6bn, quite lower than our estimate due to a sharp increase in other expenditure and power costs. OPM shrunk 363bps on a qoq basis and 670bps on a yoy basis due to the operational issues at aluminium smelters, planned shutdown of copper smelter and lower by-product revenues. Power and fuel costs as a % of sales increased from 9.7% in Q4 FY12 to 12.6% in Q1 FY13. Aluminium operations were impacted due to some grid issues at its smelter and the alumina refinery impacted by the drought situation around the plant. The decline in margins was also due to a jump in other expenditure. Other expenditure increased 36.9% qoq to Rs6.2bn, which was a surprise for us. We believe this is largely due to the inclusion of some forex losses. EBIT from the copper division declined 74.2% qoq to Rs757mn and at the aluminium business declined by 44.2% to Rs2.7bn.

Standalone PAT underperformance was cushioned by dividend received from subsidiaries

Hindalco’s PAT of Rs4.3bn was lower than our estimate of Rs5bn. The underperformance in PAT was cushioned by dividend received from group companies. HNDL received Rs1.3bn as dividends from its subsidiary companies.

Novelis rolled product volumes recover on a qoq basis

Novelis reported an 18.1% yoy decline in topline to US$2.6bn due to a decline in both, volumes and realisations. Shipments during the quarter declined 6.1% yoy to 0.748mn tons, but were higher by 1.4% qoq as demand for rolled product recovered marginally. Decline in shipments was highest in Asia (11.1%), followed by North America (7.9%) and Europe (5.9%). Volumes in South America were higher by 6.1% yoy. However, volumes showed a recovery from the lows hit in Q3 FY12 led by a recovery in all the segments. The recovery in Asia which was lower than expectations in Q4 FY12 managed to rise 5.4% qoq. Topline growth on a qoq basis was also aided by an increase in product premiums in North America. Product premiums which had declined sharply by 37.7% qoq in Q4 FY12 in North America rebounded during the quarter. This was due to an increase in share of can volumes. The share of can volumes of total sales for the consolidated activity increased on a qoq basis. Average realisations for the quarter declined 3.5% qoq against an 8.7% decline in average LME prices.

Adjusted EBIDTA/ton expands qoq on the back of higher rolled product sales

Adjusted EBITDA/ton, which is an important metric for this business model, came in at US$346/ton, higher by 9.7% qoq and lower by 9.8% yoy. Management has been focusing on technically complex products with high barriers to entry in three main segments: cans/can sheet, auto and electronics. They have reduced exposure to foils and other commoditized products. Adjusted EBITDA was US$234mn, higher by 11.2% on a qoq basis, but lower by 15.4% on a yoy basis. The decline was largely due to lower volumes.

Downside limited; Maintain Buy

Hindalco has underperformed the benchmark indices over the last one year due to soft aluminium prices globally, project delays and allocation of coal block to the Mahan smelter. We believe the downside for aluminium prices is limited as it is below the mean of the global cost curve. In addition to this, the decline in global aluminium prices is offset by the depreciation of the rupee against the dollar. The group of ministers has recommended granting of forest clearance by the Ministry of Environment and Forest (MoEF) for the Mahan Coal bloack on certain conditions. The new projects are expected to be commissioned in the second half of the year and would provide some volume boost to the company. Novelis managed to bounce back from the weak numbers reported in Q3 FY12 and has shown steady recovery, both in volumes and margins. We believe this recovery would continue going ahead and would drive the earnings of the consolidated entity over the next one year. We maintain our Buy recommendation on the stock with a revised 9-month target price of Rs147.