CMP Rs149, Target Rs144, Downside 3.1% 

• Hindalco’s standalone operational numbers were quite stronger than estimate on the back of higher copper volumes and strong aluminium spot premiums

• Copper production volume growth continued to remain strong at 13.5% yoy to 96,000 tons

• Total aluminium production too remained strong at 175,000 tons led by a rampup in production at Mahan

• Operating profit of Rs8.4bn was quite higher than our estimate due to improved performance in the aluminium division

• Current rally ignoring execution risks; Downgrade to Market Performer with a price target of Rs144

Result table

(Rs mn)	Q4 FY14	Q4 FY13	% yoy	Q3 FY14	% qoq
Net sales	84,351	69,938	20.6	72,731	16.0
Material costs	(55,980)	(47,143)	18.7	(48,522)	15.4
Power and fuel costs	(9,206)	(7,544)	22.0	(9,486)	(3.0)
Personnel costs	(3,505)	(2,895)	21.1	(3,324)	5.4
Other overheads	(7,219)	(5,924)	21.9	(5,104)	41.5
Operating profit	8,441	6,432	31.2	6,295	34.1
OPM (%)	10.0	9.2	81 bps	8.7	135 bps
Depreciation	(2,441)	(1,726)	41.4	(1,998)	22.2
Interest	(2,146)	(1,577)	36.1	(1,652)	29.9
Other income	2,125	2,312	(8.1)	2,042	4.1
PBT	5,979	5,442	9.9	4,687	27.6
Tax	462	(621)	(174.4)	(1,347)	(134.3)
Effective tax rate (%)	(7.7)	11.4		28.7
Adjusted PAT	6,441	4,820	33.6	3,340	92.9
Adj. PAT margin (%)	7.6	6.9	74 bps	4.6	304 bps
Extra ordinary items	(3,960)	-	-	-	-
Reported PAT	2,482	4,820	(48.5)	3,340	(25.7)
Ann. EPS (Rs)	26.9	20.1	33.6	14.0	92.8

Source: Company, India Infoline Research

Higher volumes boost topline by 20.6% yoy

Standalone revenue of Rs84.4bn was higher by 20.6% yoy and 16% 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. Aluminium production increased 23.2% yoy and 10.8% qoq to 175,000 tons (excluding the production at Mahan). Copper production too was higher by 13.5% yoy and 7.9% qoq at 96,000 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 also boosted by an increase in product premiums. Product premiums were higher on a qoq basis. Alumina production too was strong at 8.4% qoq on the back of higher production at Utkal. The Mahan smelter managed to increase its production from 18,100 tons in Q3 FY14 to 29,000 tons and that at Utkal increased from 87,000 tons to 147,000 tons.

Quarterly production

As a % of net sales	Q4 FY14*	Q4 FY13	% yoy	Q3 FY14*	% qoq
Alumina	465,000	330,000	40.9	429,000	8.4
Aluminium	175,000	142,000	23.2	158,000	10.8
Copper Cathodes	96,000	84,600	13.5	89,000	7.9

Source: Company, India Infoline Research * includes trail production

Higher product premiums coupled with lower power costs led to a 31.2% yoy jump in operating profit

Hindalco’s operational performance was quite higher than our estimate. Operating profit for the quarter stood at Rs8.8bn, higher by 31.2% yoy and 34.1% qoq. The outperformance in operating profit was largely led by the strong performance of the aluminium division. Aluminium business EBIT doubled on a qoq basis and was higher by 23.3% yoy to Rs3.5bn on the back of strong sales volume, higher product premiums and lower power costs. Power costs as a % of sales declined by 213bps qoq to 10.9% in Q4 FY14. Copper business continued to register strong performance due to a ramp up in volumes and higher Tc/Tc margins. Though copper business EBIT margins were lower on a qoq basis, it was higher than our expectations. After registering its lowest EBIT margins in Q3 FY14, aluminium business managed to register an EBIT margin of 11.6% in Q4 FY14.

Cost Analysis

As a % of net sales	Q4 FY14	Q4 FY13	bps yoy	Q3 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

Current rally ignoring execution risks; Downgrade to Market Performer

Hindalco has outperformed its peers over the last one quarter on expectations of a faster clearance for its coal mines and a ramp in aluminium production. The company managed to receive the forest stage-2 clearance from its Mahan Coal block in Q4 FY14 and is awaiting the signing of the mining lease. We believe that commissioning of the coal mine would take a minimum of 2 years and hence near term impact would be quite minimal. Metal production rampup is expected to remain lower due to unavailability of captive coal. Project returns from Mahan and Aditya smelters will be muted due to the high cost of production and subdued aluminum prices. Expansion in margins at Novelis is expected to be constrained by the high metal premiums and rising competition in Asia from China. Valuations at 6.1X FY16E EV/EBITDA are high and are building in a faster rampup in aluminium production in FY16. But, it is ignoring risk involved in ramping up the smelters and the commencement of coal mine. Downgrade to Market Performer rating with a price target of Rs144.

Segmental results

Y/e 31 Mar (Rs m)	Q4 FY14	Q4 FY13	yoy chng		Q4 FY14			Q4 FY13
Sales (Rs m)				in %			Sales Contribution (%)
Aluminium Business	30,246	23,961		26.2		35.9			34.3
Copper Business	54,217	46,067		17.7		64.3			65.9
Less: Intersegment Rev	(113)	(90)		25.8		(0.1)			(0.1)
Total	84,351	69,938		20.6		100.0			100.0
EBIT (Rs m)				in %		EBIT contribution (%)
Aluminium Business	3,496	2,835		23.3		173.1			52.1
Copper Business	3,184	2,586		23.2		157.7			47.5
Others	(4,661)	21		-		(230.8)			0.4
Total	2,019	5,442		(62.9)
EBIT margins (%)				in bps
Aluminium Business	11.6	11.8		(28)
Copper Business	5.9	5.6		26
Total	2.4	7.8		(539)
ROCE (%)				in bps
Aluminium Business	3.9	11.8		(797)
Copper Business	22.9	5.6		1,727
Total	1.2	7.8		(654)

Source: Company, India Infoline Research

Financial Summary

Y/e 31 Mar (Rs m)	FY13	FY14E	FY15E	FY16E
Revenues	801,928	876,955	1,006,130	1,098,542
yoy growth (%)	(0.8)	9.4	14.7	9.2
Operating profit	78,368	82,863	114,496	131,099
OPM (%)	9.8	9.4	11.4	11.9
Pre-exceptional PAT	30,269	25,710	43,997	50,838
Reported PAT	30,269	21,750	43,997	50,838
yoy growth (%)	(10.9)	(28.1)	102.3	15.5
EPS (Rs)	15.8	12.5	21.3	24.6
P/E (x)	9.4	12.0	7.0	6.1
Price/Book (x)	0.8	0.8	0.7	0.6
EV/EBITDA (x)	10.3	10.8	7.4	6.1
Debt/Equity (x)	1.6	1.6	1.4	1.2
RoE (%)	9.0	6.8	10.3	10.8
RoCE (%)	6.8	5.6	7.9	8.8

Source: Company, India Infoline Research