Upgrade Hindalco to ‘hold’ from ‘sell’ with a revised target price of R145 (R130 earlier) due to limited downside post recent underperformance of the stock and rerating trigger dependent on outcome of upcoming coal block auctions. The stock trades at FY15e/16e EV/ebitda of 8.1/6.9x on consolidated earnings. Though the balance sheet remains debt heavy, gradual deleveraging is expected from FY16e as capex cycle comes to an end. We value the company on SOTP basis using September 2016e earnings.
Hindalco ebitda margins in standalone operations improved by 110 bps q-o-q led by higher ebit from copper operations (up 31% q-o-q) driven by operational efficiencies. Aluminium division reported 6% higher ebit q-o-q led by higher volumes, better LME prices and strong premiums though negated by higher coal costs and shutdown at Hirakud/Aditya smelters. PAT was supressed by exceptional expense of R430 crore comprising of coal penalty levy, provision of reduction in carrying value of AB minerals and forex gain. Novelis performance was muted with adjusted ebitda per tonne at $301/tonne, flat q-o-q.
We remain positive on volume growth in the domestic aluminium business but costs are expected to remain high due to the lack of captive coal for smelters and coal block auctions hold the key.