Hindalco standalone Q3FY16 Ebitda (earnings before interest taxes depreciation and amortisation) of R6.2 bn (down c33% y-o-y, but flat q-o-q) was ahead of our and consensus expectations. Aluminium volumes improved 36% y-o-y as new facilities (Aditya and Mahan) reported highest-ever production. Rising utilisation (and therefore efficiencies), and lower energy costs allowed aluminium segment to report positive Ebit (earnings before interest and taxes) despite a 6% drop in sequential aluminium prices. HNDL communicated that its new alumina refinery (Utkal) is now among the lowest cost refineries in the world and that coal mining has started from Gare Palm IV/4 mine. Copper segment Ebit was down c12% y-o-y (flat q-o-q), largely due to removal of export incentives, which was partially offset by higher (treatment and refining charges) TC/RC and acid realisations.
Novelis (NVL): Weak European markets subdue growth in auto shipments
Novelis reported Q3FY16 adjusted Ebitda of $238m, up c4% following 3% growth in shipments and 1% improvement in per tonne Ebitda. NVL’s auto shipments grew 52% y-o-y; and now form c15% of total shipments. However, weakness in other businesses (notably Europe where Ebitda fell c30% despite c6% growth in volumes) resulted in subdued growth. NVL’s shipments in Asia continue to struggle against overcapacity and low physical market premiums in China.
NVL retained its guidance of reporting positive FCF (free cash flow) for FY16, which implies over $300m free cash generation in Q4FY16. Release of working capital (due to falling aluminium prices), lower capital spend and absence of interest payments will allow NVL to report large FCF generation in the last quarter of current fiscal.
Reiterate Buy on HNDL with lower TP of R91 (was R100)
We cut FY16/17e Ebitda estimates by c9/3% following lower than expected Q3 NVL results. Although aluminium markets remain challenged, we believe production ramp up and implementation of cost cutting measures will help HNDL tide over this difficult period. We continue to remain optimistic on the size of the auto-panel opportunity and the benefits that will accrue to subsidiary Novelis. Our new TP of R91 implies 30% upside and we retain a Buy rating.
We set a fair value target price of R91/share (R100 earlier). We continue to value HNDL on a FY17e EV/Ebitda-based sum-of-the-parts approach, with multiples of 5.5x (in line with its 5-yr average and with peers in the sector) for the standalone and 6.5x (which we believe should trade higher than its standalone business given that it does not have commodity pricing risk) for Novelis, and discount the valuation base to 2016e based on our assumption of cost of equity (approach unchanged).
We include a value from HNDL’s investments in various group companies at a 20% discount to their respective market values on a conservative basis. Our target price of R91 implies upside of 30%; we rate the shares a Buy.
Downside risks: Lower-than-expected aluminium prices and copper TC/RCs form key risks. While we expect Novelis’ performance to improve, the overhang of exposure to developed markets remains and prolonged macro weakness in these markets could hurt shipments and earnings. Also, NVL’s auto sheets segment is leveraged to the focus on tightening of fuel efficiency and emission norms and hence policy backtracking could hurt volume growth.