Hindalco Ltd (Q1 FY14)

India Infoline News Service | Mumbai |

The impact of lower product premiums in the can business in North America and higher aluminium spot premiums in Asia led to lower margins for the company.

CMP Rs90, Target Rs111, Upside 22.9%

  • Hindalco’s subsidiary, Novelis, reported a weak set of numbers, both on volume as well as operating margin front. Disappointment in volumes was largely on account of lower volumes in North America, which was impacted by lower can demand. Excess capacity and higher metal premiums in Asia and North America led to lower margins.


  • Novelis reported a 5.9% yoy decline in topline on account of lower realisations. Volumes were flat on a yoy basis as the impact of higher sales in Asia was offset by weaker demand of cans in North America. Due to the coal and wet weather conditions in North America during the quarter demand for cans was subdued. In addition to this, excess capacity in the region led to lower product premiums on its can business. Volumes in US declined 11% yoy to 0.25mn tons and that in Asia jumped 16% yoy to 0.16mn tons. The company now plans to transform its can business to automotive sheet business due to the excess can making capacity in the system. The company expects demand from automotive players to remain strong in the near term.


  • The impact of lower product premiums in the can business in North America and higher aluminium spot premiums in Asia led to lower margins for the company. Adjusted EBITDA/ton, which is an important metric for this business model, came in at US$272/ton, significantly lower than our estimate and the company’s last one year performance. It was lower by 21.6% yoy and 16.9% qoq. Adjusted EBIDTA for the quarter stood at US$204mn, 21.2% lower on a yoy basis. The management has indicated that the decline in operating profit was due to one time employee plan amendment of US$14mn and US$48mn due to lower prices and change in product mix. However, this impact was lowered by cost savings of US$23mn.


  • Margins in the Asian market would not rise significantly over the next two years due to excess capacity in China. This impact would be curtailed by an increase in consumption of recycled metal in Korea. Change in product mix from cans to automotive sheets would lead to a margin expansion in North America over the next two years.

Cost Analysis
As a % of net sales
Q1 FY14
Q1 FY13
% yoy
Q4 FY13
% qoq
Shipments ('000 tons)
751
748
0.4
734
2.3
Realisation (US$/ton)
3,206
3,409
(5.9)
3,406
(5.9)
Revenue (US$ mn)
2,408
2,550
(5.6)
2,500
(3.7)
EBIDTA (US$ mn)
173
234
(26.1)
235
(26.4)
Adjusted EBIDTA (US$ mn)
204
259
(21.2)
240
(15.0)
Adjusted EBIDTA/ton (US$/ton)
272
346
(21.6)
327
(16.9)
Source: Company, India Infoline Research
  • Company’s expansion plans are on track. In July ‘13, the company began the commissioning process at both its new hot and cold mills in Korea. This largely completes the US$400mn investment in Korea to add ~0.35mtpa of incremental rolling capacity and 0.265mtpa of recycling capacity that came online late last year. Novelis also began the commissioning process at its two new automotive finishing lines in North America last month. The commissioning process for this approximately 0.24mtpa expansion will ramp up through H2 FY14. In addition, the Company's rolling expansion in Brazil continues to successfully accelerate production as expected with customer qualification largely complete.


  • 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 in H2 FY14 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 maintain our Buy recommendation on the stock with a revised 9-month target price of Rs111.

Result table (Novelis)
(US$ mn)
Q1 FY14
Q1 FY13
% yoy
Q4 FY13
% qoq
Shipments
751
748
0.4
734
2.3
Realisation (US$/ton)
3,206
3,409
(5.9)
3,406
(5.9)
Net sales
2,408
2,550
(5.6)
2,500
(3.7)
Material costs
(2,105)
(2,202)
(4.4)
(2,162)
(2.6)
SG&A
(120)
(102)
17.6
(93)
29.0
R&D
(10)
(12)
(16.7)
(10)
-
Operating profit
173
234
(26.1)
235
BSE 239.00 [0.70] ([0.29]%)
NSE 239.35 [0.35] ([0.15]%)

***Note: This is a NSE Chart

 

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