Fall in alumina price and robust LME Al price are positives; the focus on value-added products is likely to boost profitability.
Hindalco industries’ (hindalco’s) Q3FY18 (standalone) Ebitda at Rs 13.1 bn marginally missed estimate due to: higher cost at Al division offsetting the benefit of LME & higher volume; and lower realisation & TC/RC for copper (Cu) division. However, Ebitda (including Utkal) came broadly in line. The company repaid Rs 11 bn project debt during the quarter. Going ahead, we expect standalone margin to improve as alumina price has fallen ~14% q-o-q and LME Al price has been robust. Maintain Buy with TP of Rs 325, implying ~7x FY19e Ebitda.
Ebitda narrowly misses estimate: Hindalco’s standalone Ebitda rose mere 11% y-o-y to Rs 13.1 bn despite LME Al price rising 23% y-o-y due to higher cost of alumina and carbon derivatives. Ebitda (including Utkal) was up 17% at Rs 11.9 bn. Al division’s Ebitda jumped 10% y-o-y (flat q-o-q) to $447 buoyed partially by higher sales of value-added products (VAP). The Cu division’s Ebitda jumped 28% y-o-y to Rs 4.3 bn due to higher volumes and by-products realisation. Going ahead, we expect improvement in standalone Ebitda due to: (i) robust LME Al prices; and (ii) relief on cost front as alumina prices have fallen & more coal is sourced from linkages.
Focus on value-added products to boost profitability: Management is focusing on low capex, high return projects to aid profitability. While CC rods’ capacity is expected to ramp-up from Q4FY18, VAP at Al division is expected to be higher by 45-50kt from Q1FY19. Management expects the incremental benefit from VAP to be $150/t in the long run. We believe, this will help Hindalco maintain Ebitda/t even if there is a decline in LME prices.
Outlook and valuations: Better times ahead — We believe, Hindalco’s domestic operations (including Utkal) are at vantage position to expand margin due to the integrated model exposed to just carbon derivatives. With the company pursuing downstream capacity growth at standalone operations and Novelis , we believe earnings momentum is likely to be maintained. The stock is trading at 6.0x FY20e Ebitda (discount to global peers). We maintain ‘BUY/SO’ with TP of Rs 325/share, implying an exit multiple of 7.0x FY20e.