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Published on 2/12/2019 11:15:48 AM | Source: ICICI Securities Ltd

Hold Hindalco Industries Ltd For Target Rs.184 - ICICI Securities

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Aluminium surprises

Hindalco Industries reported a higher than expected EBITDA for Q2FY20. Its standalone EBITDA during the quarter came in at Rs7.92bn (I-Sec: Rs6.09bn). The beat was driven by aluminium segment contributing Rs5.3bn to EBITDA (I-Sec: Rs3.6bn). This was a result of combination of higher than estimated volumes at 328kte (I-Sec: 320kte) and COP leading to an EBITDA/te at US$229/te (I-Sec: US$159/te). Copper EBITDA stood at Rs2.6bn (I-Sec: Rs2.5bn) with volumes at 82kte (I-Sec: 79kte). Standalone + Utkal EBITDA was at Rs11bn (Rs9.1bn), signifying stable Utkal EBITDA as expected. Consolidated EBITDA was Rs36.3bn (I-Sec: Rs32.7bn). Standalone + Utkal EBIDTA (purely cyclical) as a percentage of total EBITDA continues to decline reaching 30% in Q2FY20. Maintain HOLD with the target price unchanged at Rs184/share.

* Consolidated EBITDA declined 11% YoY. This was largely driven by the India business (33% of the pie), which declined 27.4%. Aluminium EBITDA declined 29% and copper EBITDA was down 32% while Novelis EBITDA increased 6% YoY. Consolidated print (introduced in Q1FY20) will incrementally highlight the necessity of pruning down the cyclical part of the business going forward.

* Standalone aluminium business surprised on better volumes, lower costs. Aluminium sales stood at 328kte in Q2FY20 and 648kte in H1FY20. Management highlighted increased exports as a reason for reduced domestic price premium (demand continues to be subdued). Export share increased to 60% of total volumes from ~55% in Q1FY20. Value-added sales remained stable QoQ at 78kte or 24% of total metal sales. Aluminium CoP came in lower than expectations leading to EBITDA/te at US$229/te in Q2FY20. Management expects a flat to slightly lower aluminum CoP in Q3FY20.

* Copper operations were weak YoY. Overall production volumes (copper cathodes) grew 17% YoY to 84kte in Q2FY20. Total copper metal sales were up 5% at 82kte in Q2FY20 vs 79kte in Q2FY19. EBITDA was lower at Rs2.63bn in Q2FY20 vs Rs4.08bn in Q2FY19 primarily due to excessive monsoons (heavy rains in Dahej in Aug’19) impacting operations and lower byproduct realisations. Management expects copper segment to fare better going forward as no shutdown is expected in Q3FY20 and monsoons have faded away.

* Maintain HOLD. Novelis continues to execute organic expansions of automotive rolling and finishing line projects in the US and China, and rolling and recycling lines in Brazil. Aleris acquisition has approvals pending in all geographies. While Duffel plant sale should lead to an EBITDA loss of US$50mn, management is confident of not losing out on the Lewisport facility. Consolidated net debt to EBITDA has increased to 2.83x in H1FY20 (from 2.48x in FY19). Maintain HOLD with the target price unchanged at Rs184/share.

 

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