Hindalco’s standalone net profit declined by 22% yoy to Rs427.1cr, in-line with our estimates of Rs448.7cr. EBITDA margins plunged on account of: 1) higher input costs, 2) lower by-product realisation, and 3) rupee appreciation. In the near term, we expect some correction in metal prices, following the recent run-up amidst high inventory levels. We maintain a Neutral on the stock.
Weak 3QFY2010 performance: Hindalco’s 3QFY2010 results were below our expectations, with net sales at Rs5,286cr, registering a growth of 30% yoy (as against our estimate of Rs5,619cr). The growth in the top-line was due to higher metal volumes and better realisations, in both the aluminium and copper segments. Revenue from the copper division increased by 60.4% yoy to Rs3,432cr, whereas that from the aluminium division declined by 4.8% yoy to Rs1,885cr. Cathode production increased by 22.3% yoy to 89,152 tonnes, while CC rods production fell by 0.7% to 32,969 tonnes. Alumina production went up by 6.5% to 339,899 tonnes, while metal production increased by 5.2% to 142,048 tonnes. Other income declined by 67% yoy to Rs49.6cr, due to a lower treasury corpus. Interest expenses fell by 21.7% yoy to Rs72.9cr. The copper division’s EBIT margins declined from 5.4% in 3QFY2009 and 6.6% in 2QFY2010 to 4.6% in 3QFY2010, due to lower by-product realisation (negative impact of Rs100cr). The aluminium division’s EBIT margins fell from 26.8% in 3QFY2009 to 23.2% in 3QFY2010, but were higher on a sequential basis. EBIDTA margins plunged by 460bp to 13.6%, due to a rise in input costs, along with the rupee’s appreciation against the dollar. Due to these reasons, net profit declined by 22% to Rs427.1cr, in-line with our estimate of Rs448.7cr.
Outlook and Valuation: At the CMP of Rs150, the stock is trading at 7.5x FY2011E and 7.2x FY2012E EV/EBITDA. In the short-term, we expect some correction in prices, following the recent run-up amidst high inventory levels. However, we believe that the metal prices are on a recovery path in CY2010E, due to the improving demand outlook. We maintain a Neutral on the stock, and would review our rating after the announcement of the consolidated financials.
Key result highlights
Hindalco’s net revenue increased by 30% yoy to Rs5,286cr, as against our estimate of Rs5,619cr. The growth in the top-line was due to higher metal volumes and better realisations, in both the aluminium and copper segments. Revenue from the copper division increased by 60.4% yoy to Rs3,432cr, whereas that from the aluminium division declined by 4.8% yoy to Rs1,885cr.
EBIDTA margins plunged by 460bp to 13.6%, due to a rise in input costs, along with the rupee’s appreciation against the dollar. Other income declined by 67% yoy to Rs49.6cr, on account of a lower treasury corpus. Interest expenses fell by 21.7% yoy. Due to these reasons, the net profit declined by 22% to Rs427.1cr, in-line with our estimate of Rs448.7cr.
Copper EBIT affected by lower TC/RCs
Cathode production increased by 22.3% yoy to 89,152 tonnes, while CC rods production fell by 0.7% to 32,969 tonnes. The copper division’s EBIT margins declined from 5.4% in 3QFY2009 and 6.6% in 2QFY2010 to 4.6% in 3QFY2010. The positive impact of higher copper realisation (up by 70% yoy to US $6,648) was partly negated by lower by-product realisations (such as sulphuric acid and fertilizer subsidy). Lower by-product realisation negatively impacted the margins to the tune of Rs100cr.
Aluminium EBIT declines by 17% yoy
On the positive side, alumina production went up by 6.5% to 339,899 tonnes, while aluminium metal production increased by 5.2% to 142,048 tonnes. The aluminium division’s EBIT margins fell from 26.8% in 3QFY2009 to 23.2% in 3QFY2010. Although realisation increased by 9.9% yoy to US $2,002/tonne, the division’s profitability was hit by: 1) rupee appreciation, and 2) a substantial increase in coal cost. The increase in coal cost impacted the margins to the tune of Rs50cr.
Status on capacity expansion plans
Brownfield expansion projects
- Hirakud:
1) Total smelter expansion from 155 ktpa to 213 ktpa – of which capacity expansion from 155 ktpa to 161 ktpa is expected to be completed by July 2010, and the balance in FY2012.
2) A project is underway for the transfer of all key equipments for flat-rolled products from the Novelis Plant to Hirakud. This will enable the company to produce body stock for the local and export markets. The project is slated for completion in 2QFY2012.
- Belgaum: Alumina production is expected to increase to 316 ktpa from 138 ktpa. The company also plans to build an 18 MW co-generation power plant and a railway siding facility.
- Mouda: A captive power plant of 20 MW is proposed at Nagpur to reduce the cost of energy. Currently awaiting statutory clearances.
Greenfield Projects:
- Utkal Alumina Project: Construction of a 1.5 mtpa alumina refinery in Orissa is on track. Production of alumina is expected to start around July 2011.
- Mahan Aluminium Project: Aluminium smelter capacity of 3.6 lakhs tpa and a captive power plant of 900 MW are being set up. Production of aluminium is expected by July 2011.
- Aditya Aluminium Project: An integrated aluminium project in Orissa, with a 1.5 mtpa alumina refinery, 359,000 tpa aluminium smelter, and 900 MW captive power plant. Production is expected to begin by October 2011.
- Jharkhand Aluminium Project: An aluminium smelter capacity of 3.6 lakh tpa, along with a 900 MW captive power plant in Jharkhand, are being set up. Production from the smelter is expected to begin by June 2013.
Outlook
Last week, aluminium inventory touched a 15-mnth high of 4.6mn tonnes. Aluminium inventory levels have increased by 98.8% in CY2009, whereas aluminium prices have risen by 45.7% during the same period. We expect the high inventory levels to be a cause of concern in the near-term, and, in our view, these will cap the upside in aluminium prices.
Currently, copper inventories are still low as compared to the high levels of 2001. Copper inventory levels have increased by 47.8% in CY2009, while copper prices have increased by 141.3% during the same period. With inventory levels increasing and the strong run up witnessed in prices last year, we expect copper prices to correct in the near-term. However, we expect prices to recover in CY2010E, on the back of strong industrial demand.
Valuation
At the CMP of Rs150, the stock is trading at 7.5x FY2011E and 7.2x FY2012E EV/EBITDA. In the short-term, we expect some correction in prices, following the recent run up amidst high inventory levels. However, we believe that the metal prices are on a recovery path in CY2010E, due to the improving demand outlook. We maintain a Neutral on the stock, and would review our rating after the announcement of the consolidated financials.
Key risks to our call: 1) Significant movements in metal prices, 2) exchange rates movements, and 3) Delay in completion of expansion projects.
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