Hindalco Industries,Axe on debt,rating ‘buy’: Edelweiss
Volumes,margins to rise in second half
The Hindalco Industries’ subsidiary,Novelis Q2FY14 adjusted Ebitda (earnings before interest,taxes,depreciation and amortisation) of $ 228 million as well as volumes and Ebitda/tonne were on expected lines. Novelis also implicitly guided for H2FY14 volume and Ebitda growth of 10% year-on-year and 15% y-o-y respectively.
Standalone Q2FY14 Ebitda at R5.4 billion was about 9% above estimate. Copper segment Ebit (earnings before interest and tax) of R2.4 billion was close to a record high while aluminium Ebit of R1.7 billion was disappointing,marred by forex loss and negative Ebit from new projects.
Copper Ebit surprises positively: Standalone Ebitda at R5.4 billion (up about 5% y-o-y and about 13% q-o-q) was nearly 9% above our estimate with revenue of R63 billion (up 2% y-o-y and 8% q-o-q),also 6% above estimate.
Aluminium segment’s revenue at R23.4 bn was 8% above estimate due to higher proportion of value added products. Nevertheless,aluminium Ebit of R1,661 million (down 2% y-o-y and 33% q-o-q) was below the estimated R2,434 million partly due to forex loss of R370m and negative Ebit from the Hirakud rolled product expansion (135ktpa capacity) which commenced production in H2FY14 with 3.1kt production. Aluminium production at 132kt (excluding Mahan trial production) was up 3% y-o-y but down 3.6% q-o-q.
Copper Ebit at R2,390 million (up 15% y-o-y and 195% q-o-q) was at record high quarterly levels (only two quarters in the last eight years had higher Ebit). This was significantly above the estimated R865 million,led by higher production,higher TcRc (treatment and refining charges) and copper smelter-III running at better efficiency post Q1FY14 shutdown. Copper production at 77kt was broadly flat y-o-y but up 13% q-o-q.
Ebitda in line; volumes and margins on expected lines: Adjusted Ebitda at $228 m (down 18% y-o-y,up 12% q-o-q) was in line with estimates. Total volumes at 765kt (nearly flat q-o-q and y-o-y) and Ebitda/t at $298 were also as per expectation. The company had strong shipments in South America (up 14% y-o-y) with capacity addition of 220ktpa and Asia (up 9% y-o-y). This was offset by weak can demand in North America (volumes down 12% y-o-y) and pricing pressure in both North America and Asia.
H2FY14 expected to see increase in volumes: Novelis expects strong H2FY14 with volumes rising 10% y-o-y led by robust can demand in South America (supported by recent capacity addition),in Asia and in European auto demand. In FY14,the company expects to largely maintain the FY13 adjusted Ebitda level of $963 million.
This would imply a 15% y-o-y increase in adjusted Ebitda in H2FY14. In addition to volume increases,price hikes taken in the auto segment are expected to boost Ebitda/t higher than the Q2FY14 level of $298. The 240kt auto finishing line in the US and 350kt rolling expansion in South Korea have been commissioned in July 2013.
Net debt reduces by $161m q-o-q: A key positive in Q2FY14 was reduction in debt from $4.92 bn in Q1FY14 to $4.76 bn in Q2FY14 led by a reduction in short-term debt and working capital. Novelis indicated capex of $360m in H2FY14 but expected to be FCF (free cash flow) positive post-capex,led by strong growth in Ebitda. This would imply further reduction in net debt.
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