India EBITDA (including Utkal) for the Q4 rose 22% q-o-q, 5% beat vs. our estimate. Al EBITDA was in line, but Cu smelting EBITDA surprised positively. Net debt also surprised positively. We trim FY18-19E EBITDA estimate marginally, but our PT rises to Rs 237 (Rs 226) due to lower net debt estimate. We believe HNDL should gain from Al cost inflation and proposed anti pollution measures in China. Novelis margin should be steady.
Strong FCF should accelerate deleveraging. Maintain Buy. Standalone Al EBITDA grew 5% to Rs 920 crore. Al volume rose 6% q-o-q (3% beat). Standalone Al EBITDA /ton was flat q-o-q at $418/ton (1% miss) despite higher Al LME (7% q-o-q), due to higher costs.
Cost increase was mainly due to transfer pricing of captive alumina from Utkal Alumina at higher cost and input costs caustic, pitch, furnace oil. The offsetting gain was reflected in Utkal EBITDA 91% q-o-q, 6% miss) as expected. Al EBITDA/ton (including Utkal) was $539/ton, up $53/ton q-o-q.
Cu TCRC EBITDA jumped 51% q-o-q to Rs 490 crore (34% beat). HNDL attributed this to 21% q-o-q increase in volumes and higher by product realisation. HNDL is sourcing 8.5mn tons of coal (53% of coal need) under linkage and 2mn tons (12.5% of coal need) from its captive Gare Palma IV/4 and IV/5 coal blocks, which have now fully ramped up. Production from captive Kathautia coal block (1mtpa) is ramping up. Dependence on e-auction coal would fall to ~25% post ramp up. 4 mn tons of linkage coal supply is under the old linkage which would expire in June 2018 and would likely be auctioned.
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Our current estimates factor expiry of old linkages in FY 19. We currently assume this would be replaced by e-auction coal.4Q consol net debt was Rs 47,700 crore (FY16 Rs 553bn). HNDL has prepaid Rs 55.4 bn of debt. It plans to prepay another Rs 22 bn in FY18. Proceeds from Ulsan stake divestment (US$315mn pre tax) should also aid in deleveraging. We factor this in our estimates. We forecast net debt to decline to Rs 36,200 crore by FY19.
We trim our FY 18-19E EBITDA by 2%/2% factoring marginally higher Al LME, stronger INR and higher Novelis EBITDA. We factor in proceeds from Ulsan stake sale. Our revised SOTPbased PT is Rs 237. We value India operations at 6x FY18E EBITDA and Novelis at 7x FY18E EBITDA.