Hindalco - Buy for long term (TP: Rs 205)
Hindalco’s subsidiary, Novelis, reported excellent results for 1Q FY11, beating Street expectations. Novelis now appears set to reap the benefits of cost cuts, increasing demand and growth. Hindalco remains well on track to achieve our 18% above-consensus earnings estimates for FY11; reaffirm our Outperform and Target Price of Rs 205.
Impact
- Earnings showing increasing trend: Net sales of US$2.5bn were up 29% YoY and 5% QoQ as both shipments and realisation were up. Operating EBITDA of US$282m is up from US$42m reported last year and 38% above US$205m last quarter. PAT of US$50m compared to a loss of US$1m in the last quarter. The company was operating at capacity during the quarter, reporting peak shipments. In addition, results reflected the sustainability of cost cuts, which did not increase in line with volumes.
- On track to achieve FY11E: Our estimate for Novelis’s FY11 EBITDA is US$967m, which implies EBITDA-per-ton of US$336 and volume of 2.8mt. In 1Q, Novelis achieved EBITDA of US$282m and shipment volume of 0.75mt, about 30% and 26% of our respective full year assumptions.
- Growth plans: Novelis plans to expand its capacity by 10% in the next two years through brownfield expansion and de-bottlenecking its existing to fund its proposed capex from internal accruals.
- Extremely bullish outlook: Management expects to exceed US$1bn of adjusted EBITDA in FY11, and expects FCF of more than US$335m in FY11. The company expects margin gains from operational efficiencies, product portfolio optimisation and strong spot pricing. We are building in EBITDA of US$967m compared with guidance of US$1bn in EBITDA
Price catalyst
- 12-month price target: Rs205.00 based on a PER methodology.
- Catalyst: Increased confidence in earnings sustainability of Novelis.
Action and recommendation
Maintain Outperform: We believe Hindalco offers good value and has strong growth drivers. Around 60% of Hindalco’s earnings come from its subsidiary Novelis, making it minimally dependent on aluminium prices. We think a recovery in Novelis will be the key driver of earnings in FY11. From FY12 onward, it will start commissioning its three-fold increase in aluminum capacity, which will be backed, in our view, by 200m of bauxite resources, making Hindalco the lowest-cost producer.
