Hindalco Ltd (Q3 FY14)

India Infoline News Service | Mumbai |

Hindalco's subsidiary, Novelis, reported marginally weaker than expected numbers.

CMP Rs105, Target Rs129, Upside 23.9%
  • Hindalco's subsidiary, Novelis, reported marginally weaker than expected numbers. The impact of higher volumes was offset by pressure on margins. The company reported its best ever Q3 volumes since FY08 on the back of strong performance across all geographies. Novelis reported 10% yoy growth in volumes across all segments. However, margins were under pressure due to excess capacity of cans in US and Asia and higher metal premium in Asia.

  • The company reported a 4.4% yoy growth in topline to US$2.5bn as the impact of 11.2% yoy increase in volumes was offset by a 6.2% yoy decline in realisations. The decline in blended realisations was accentuated by a decline in product premiums in US and Asia. Product premiums have declined in the above two regions due to excess capacity in can segment. Sales volume of 0.77mn tons was the highest ever Q3 sales volume since the boom of FY08. The jump in overall sales volume was across the four regions. All the geographies reported more than 10% yoy growth in sales volume in Q3 FY14. This was led by change in product mix towards the automotive sector which has been performing quite well in the last two years. Except South America, product premiums have reduced on a yoy basis in the rest. The company plans to change its product mix towards the automotive sector and expects the sector to account for 25% of total sales from 6% in FY13.

  • 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$263/ton, lower than our estimate. It was also lower than US$298/ton achieved in Q2 FY14. On a yoy basis this was due to change in lower product premiums, increase in employee costs and less favourable scrap benefits. Margins were further impacted by the cost involved in ramping up new capacities. Adjusted EBIDTA for the quarter stood at US$203mn, 9.7% higher on a yoy basis and 16.4% lower on a qoq basis. Last year's Q3 FY13 numbers were impacted by implementation of ERP systems.

Cost Analysis
As a % of net sales Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Shipments ('000 tons) 772 694 11.2 765 0.9
Realisation (US$/ton) 3,137 3,344 (6.2) 3,173 (1.1)
Revenue (US$ mn) 2,422 2,321 4.4 2,427 (0.2)
EBIDTA (US$ mn) 183 173 5.8 219 (16.4)
Adjusted EBIDTA (US$ mn) 203 185 9.7 228 (11.0)
Adjusted EBIDTA/ton (US$/ton) 263 267 (1.4) 298 (11.8)
Source: Company, India Infoline Research
  • The company has increased the capex guidance for FY14 and FY15 in its effort to change in mix towards the automotive industry. The company has announced capex of US$205mn in Germany and US to add 0.24mn tons Auto finishing capacity which is expected to start from end CY15. With the automotive sector demand rising, the company has changed its product mix towards automotive rolled products leading to higher margins. The company is also increasing its recycling capacity to increase its input costs in the near term. We believe the strong volume growth expected from the new capacities in South America and Asia would drive margins in H2 FY14 and FY15. The company expects 0.11mn tons of incremental volumes in H2 FY14.
  • We would revise our estimates post the Hindalco numbers are announced. We maintain our BUY recommendation on the stock with a price target of Rs129.
Result table (Novelis)
(US$ mn) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Shipments 772 694 11.2 765 0.9
Realisation (US$/ton) 3,137 3,344 (6.2) 3,173 (1.1)
Net sales 2,422 2,321 4.4 2,427 (0.2)
Material costs (2,112) (2,036) 3.7 (2,087) 1.2
SG&A (115) (101) 13.9 (109) 5.5
R&D (12) (11) 9.1 (12) -
Operating profit 183 173 5.8 219 (16.4)
OPM (%) 7.6 7.5 10 bps 9.0 -46 bps
Depreciation (91) (76) 19.7 (79) 15.2
Interest (76) (76) - (75) 1.3
Other income 12 8 50.0 5 140.0
PBT 28 29 (3.4) 70 (60.0)
Tax 3 (11) - (26) -
Effective tax rate (%) (10.7) 37.9 37.1
Other prov / minority etc (5) (10) (50.0) (3) 66.7
Adjusted PAT 26 8 225.0 41 (36.6)
Adj. PAT margin (%) 1.1 0.3 73 bps 1.7 397 bps
Extra ordinary items (13) (5) 160.0 (18) (27.8)
Reported PAT 13 3 333.3 23 (43.5)
Source: Company, India Infoline Research

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