Hindalco Industries gets ‘outperform’ rating

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Updated: June 6, 2016 9:31:26 AM

Hindalco's consolidated net debt remained stable in FY16

Hindalco’s consol. net debt (.3 bn, reported only once a year) remained stable in FY16. (Source: Website)Hindalco’s consol. net debt (.3 bn, reported only once a year) remained stable in FY16. (Source: Website)

Hindalco’s Q4 standalone Ebitda beat CS (and consensus) estimates by a wide margin, primarily due to higher Aluminium volumes and lower energy costs. As a result, profit after tax came in significantly higher despite higher depreciation/lower other income.

* We estimate that power cost for Aluminium fell by $150/t q-o-q. While a part of the fall is likely driven by cheaper coal (CIL e-auction prices down 12% q-o-q), operational efficiencies (as smelters near full utilisation) could also likely be a reason. Utkal alumina refinery generated a strong $78/t of Ebitda in FY16.

* Hindalco’s consol. net debt ($8.3 bn, reported only once a year) remained stable in FY16. We could see some minor deleveraging in FY17 as Novelis generates $200 million+ of FCF (6% FCF yield, link), while standalone operations remain largely FCF neutral.

*  Our FY17-18 EPS rises 1-2% as we incorporate lower costs/better Utkal profitability (offset by higher depreciation). With most concerns now behind us (coal de-allocation, smelter ramp-up, falling physical premiums), Hindalco should benefit as London Metal Exchange Aluminium prices recover (metal in deficit in 2016 as per CS house view).

Ebitda beat on higher volumes, lower energy costs

We estimate that power cost for Aluminium fell by $150/t q-o-q. While a part of the fall is likely driven by cheaper coal (CIL e-auction prices down 12% q-o-q), operational efficiencies (as smelters near full-utilisation) could also likely be a reason. Utkal alumina refinery generated a strong $78/t of Ebitda in FY16.

Other takeaways from the conference call

*  Management doesn’t expect any meaningful impact from the lack of hedging gains that benefitted Hindalco in FY16 (likely due to favourable hedges that it entered into in FY15). Hindalco hedges in a defensive manner, whenever opportunities open up.

*  Since the benefit from the import duty hike (from 5% to 7.5%) only applies to domestic sales (64% of output), the gains were more than offset by the doubling of coal cess.

*  Management expects coal linkage auctions for the Aluminium sector to come up in the second half of this year.

*  While Ebit generation in the Copper segment was robust in Q4, production was down 7% y-o-y due to operational issues. The ongoing maintenance shutdown would impact 1Q17 output too, beyond which production should normalise.

Valuations

Our FY17-18 EPS rises 1-2% as we incorporate lower costs/better Utkal profitability (offset by higher depreciation). With most concerns now behind us (coal de-allocation, smelter ramp-up, falling physical premiums), Hindalco should benefit as LME Al prices recover (metal in deficit in 2016 as per CS house view).

—Credit Suisse

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