CMP Rs100, Target Rs120, Upside 20%

• Hindalco's standalone operational numbers were marginally lower than estimate led by weaker aluminium business profits

• For the second consecutive quarter the weak performance of aluminium business was offset by strong copper numbers

• Production of both, copper and aluminium was higher by 0.7% yoy and 6% yoy, respectively

• Operating profit of Rs6.2bn was lower than our estimate due to lower product premiums and high coal costs

• The company has not capitalized the Mahan smelter and the Utkal refinery. It also had the first metal taping at its Aditya smelter.

• Earnings growth to resume in FY15, Maintain Buy with a revised price target of Rs120.

Result table (Standalone)

(Rs mn)	Q3 FY14	Q3 FY13	% yoy	Q2 FY14	% qoq
Net sales	72,731	68,717	5.8	63,049	15.4
Material costs	(48,522)	(46,570)	4.2	(40,072)	21.1
Power and fuel costs	(9,486)	(7,549)	25.7	(8,822)	7.5
Personnel costs	(3,324)	(3,082)	7.8	(3,608)	(7.9)
Other overheads	(5,104)	(5,695)	(10.4)	(5,148)	(0.9)
Operating profit	6,295	5,821	8.1	5,398	16.6
OPM (%)	8.7	8.5	18 bps	8.6	9 bps
Depreciation	(1,998)	(1,884)	6.1	(1,964)	1.8
Interest	(1,652)	(1,690)	(2.3)	(1,832)	(9.8)
Other income	2,042	3,181	(35.8)	2,798	(27.0)
PBT	4,687	5,428	(13.7)	4,401	6.5
Tax	(1,347)	(1,093)	23.3	(830)	62.3
Effective tax rate (%)	28.7	20.1		18.9
Adjusted PAT	3,340	4,335	(23.0)	3,571	(6.5)
Adj. PAT margin (%)	4.6	6.3	(172) bps	5.7	(107) bps
Reported PAT	3,340	4,335	(23.0)	3,571	(6.5)
Ann. EPS (Rs)	14.0	18.1	(23.0)	14.9	(6.5)

Source: Company, India Infoline Research

Higher volumes boost topline by 5.8% yoy

Standalone revenue of Rs72.7bn was higher by 5.8% yoy and 15.4% qoq.  It was also higher than our estimate led by higher than expected sales volume. The company managed to ramp up its aluminium production during the quarter after reporting below par numbers in H1 FY14. Aluminium production increased by 0.7% yoy and 6.1% qoq to 140,000 tons (excluding the trial production of 18,000 tons at Mahan). Copper production too was higher by 6% yoy and 15.6% qoq at 89,000 tons. The management attributed the strong copper production growth to better feed rate and operating efficiencies. For the aluminium division, the growth in revenue was curtailed by lower product premiums. Product premiums were lower on a qoq basis due to lower sales of VAP. Alumina production too was strong on a qoq basis. The Mahan smelter managed to increased its production from 7,400 tons in Q2 FY14 to 18,100 tons and that at Utkal increased from 41,000 tons to 87,000 tons. The company also had its first metal tapping at its Aditya aluminium smelter.

Quarterly production

As a % of net sales	Q3 FY14	Q3 FY13	% yoy	Q2 FY14	% qoq
Alumina	342,000	326,000	4.9	334,000	2.4
Aluminium	140,000	139,000	0.7	132,000	6.1
Rolled Products	59,700	59,000	1.2	65,000	(8.2)
Extrusion	9,500	8,886	6.9	10,000	(5.0)
Copper Cathodes	89,000	84,000	6.0	77,000	15.6

Source: Company, India Infoline Research

Operating profit impacted by high power costs and lower product premiums

Hindalco's operational performance was marginally lower than our estimate of Rs6.9bn. However, on a yoy basis it was higher by 8.1% yoy on account of both higher volumes and realisation. Aluminium business EBIT was quite lower than our estimate due to high power costs. Spot premiums reduced on a qoq basis for the company leading to a 20bps decrease in EBIT margins. Aluminium business EBIT stood at 6.9%, the lowest for the last five years. This impact on overall operating profit was lowered by a strong performance by the copper division. The company for the second consecutive quarter reported its highest margins over the last three years. Power and Fuel costs as a % of sales increased from 11% in Q3 FY13 to 13% due to lower linkage coal.

Cost Analysis

As a % of net sales	Q3 FY14	Q3 FY13	bps yoy	Q2 FY14	bps qoq
Material costs	66.7	67.8	(106)	63.6	316
Power and fuel costs	13.0	11.0	206	14.0	(95)
Personnel Costs	4.6	4.5	8	5.7	(115)
Other overheads	7.0	8.3	(127)	8.2	(115)
Total costs	91.3	91.5	(18)	91.4	(9)

Source: Company, India Infoline Research

Earnings growth to resume; 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 new projects would provide some volume boost to the company in FY15E. We believe Novelis would register strong earnings growth on the back of increased capacity and change in product mix. This would drive the earnings of the consolidated entity over the next one year. We recommend Buy on the stock with a revised target price of Rs120.

Segmental results

Y/e 31 Mar (Rs m)		Q3 FY14		Q3 FY13		yoy chng		Q3 FY14	Q3 FY13
Sales (Rs m)					in %			Sales Contribution (%)
Aluminium Business	24,713		22,155		11.5		34.0			32.2
Copper Business	48,167		46,608		3.3		66.2			67.8
Less: Intersegment Rev	(149)		(46)		225.6		(0.2)			(0.1)
Total	72,731		68,717		5.8		100.0			100.0
EBIT (Rs m)					in %		EBIT contribution (%)
Aluminium Business	1,696		2,064		(17.8)		36.2			38.0
Copper Business	2,999		2,252		33.2		64.0			41.5
Others	(8)		1,112		(100.7)		(0.2)			20.5
Total	4,687		5,428		(13.7)
EBIT margins (%)					in bps
Aluminium Business	6.9		9.3		(245)
Copper Business	6.2		4.8		139
Total	6.4		7.9		(145)
ROCE (%)					in bps
Aluminium Business	1.9		9.3		(741)
Copper Business	20.0		4.8		1,519
Total	2.9		7.9		(502)

Source: Company, India Infoline Research

Financial Summary

Y/e 31 Mar (Rs m)	FY13	FY14E	FY15E	FY16E
Revenues	801,928	906,571	1,018,149	1,110,550
yoy growth (%)	(0.8)	13.0	12.3	9.1
Operating profit	78,368	86,226	108,798	125,146
OPM (%)	9.8	9.5	10.7	11.3
Pre-exceptional PAT	30,269	26,486	36,405	42,997
Reported PAT	30,269	26,486	36,405	42,997
yoy growth (%)	(10.9)	(12.5)	37.4	18.1
EPS (Rs)	15.8	12.8	17.6	20.8
P/E (x)	6.3	7.8	5.7	4.8
Price/Book (x)	0.5	0.5	0.5	0.4
EV/EBITDA (x)	9.1	8.5	6.6	5.5
Debt/Equity (x)	1.6	1.5	1.3	1.1
RoE (%)	9.0	7.1	8.9	9.7
RoCE (%)	6.8	6.3	7.8	8.9

Source: Company, India Infoline Research