In-line; cost pressure only fraction of AL industry trend
Strong Cu performance; Reiterate Buy
Hindalco’s (HNDL) 2QFY18 standalone (S/A) EBITDA increased 20% YoY to INR13.9b (in line with our estimate), driven by margin expansion in both copper (Cu) and aluminum (AL) segments. Utkal Alumina’s (100% subsidiary) EBITDA too increased by 18% to INR2b. Thus, total EBITDA of Indian (S/A+Utkal) increased 20% YoY to INR15.9b. There were EO items of INR1b toward mining, DMF, etc. Adj. PAT increased 25% YoY to INR5b, missing our estimate by 6%, due to a higher tax rate and lower other income.
Aluminum: Cost pressure only fraction of industry-wide trend
* HNDL is largely insulated from industry trend in high input cost inflation due to its diversified source of coal supply and access to high-quality bauxite mines. Cost of production may have increased by ~USD100/t QoQ on carbon prices, which accounts for 15% of its CoP. Shipments increased 10% QoQ to 329kt.
* EBITDA/t (incl. Utkal) declined 10% QoQ to USD534/t due to pricing pressure and some hedging losses. We expect EBITDA/t to increase to USD600 in subsequent quarters, as 50% of production is not hedged, while average LME is higher. Only 20% of FY19 production is hedged, which leaves room for upside.
Hindalco remains our top pick; Reiterating Buy
* Auto light weighting will continue driving demand for rolled products. Novelis is planning to invest in another auto line to cater to growing demand, while it continues to evaluate inorganic opportunities. Novelis raised EBITDA guidance to USD1.15-1.2b on a strong performance.
* We are now more bullish on LME due to rising cost of production for smelters across the world. HNDL will benefit from integration. We value the stock at INR326. Reiterating Buy.
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