Hindalco Industries - Macquarie

 

Aluminium underperforms

 

Event

􀂃 4Q FY3/08 standalone results below expectations: Hindalco's 4Q FY3/08 standalone results were 20% below our estimates at the operating level due to lower realisations and higher costs in the aluminium segment. However, our full-year FY3/08 estimates were met.

 

Impact

􀂃 Results hit by aluminium costs: Net sales of Rs50.1bn were up by 5.5% due to higher copper prices. EBITDA of Rs7.97bn was down 24% YoY, driven by a 31% drop in aluminium profits. Net profit of Rs10.8bn grew by 49%, driven by extraordinary income due to writebacks.

􀂃 Aluminium – surprise loser: The aluminium division was surprised by a sharp rise in costs, which was mostly accounted for by a 17% increase in power costs. The lower availability of linkage coal from Coal India has forced the company to make open market purchases for its captive power. Also, realisations were 6% lower than our estimates.

􀂃 Copper – surprise winner: In spite of 42% lower TC/RCs, the copper division has been able to improve profitability by 25% YoY. Rising product prices and better working capital management made copper the surprise winner.

􀂃 Expansions remain on track: The Muri alumina refinery expansion, by 390kt, has been completed. The Hirakud aluminium smelter expansion, by 43ktpa, is expected to be completed by 2Q FY3/09. Hindalco management has released a timeline guidance for all major Greenfield expansions, with Utkal expected first by 3Q CY10.

􀂃 Copper mine – can be more valuable: Hindalco's 51%-owned copper mine (ABML AU) has turned in a 73% increase in volume growth and a 3.5-fold increase in profitability. With an improving mine life and a higher probability to add further reserves, ABML can turn out to be more valuable, in our view.

 

Earnings revision

􀂃 No change.

 

Price catalyst

􀂃 12-month price target: Rs251.00 based on a Sum of Parts methodology.

􀂃 Catalyst: Higher aluminium prices and better profitability in copper division.

 

Action and recommendation

􀂃 Maintain Outperform: We maintain our Outperform recommendation on Hindalco because we expect a turnaround in Novelis to drive profitability sharply higher in FY3/09. Valuations remain attractive at around a 10x PER based on FY3/09E, given a strong growth profile, large accretion of coal and bauxite reserves and earnings growth potential.