Hindalco Industries' Q2FY19 results (Outperformer) - Novelis shines, India aluminium hit by cost push

Q2FY19 result- Improved scrap spread boosts Novelis, India aluminium hit by higher CoP

• Hindalco’s Indian operation reported better-than-expected results due to improved performance of both aluminium and copper. It reported EBITDA of Rs. 17.5bn, up 4.8% yoy (7% higher than IDFCe). Novelis too exceeded estimates and recorded adj EBITDA of US$355m, up 17.5% yoy with EBITDA/t of US$440, up 16.8% yoy.
• Standalone aluminium EBITDA (incl Utkal Alumina) at Rs 13.6bn, was down 10.9% qoq despite 9% qoq increase in sales volumes to 326kt. This was due to 6% qoq increase in CoP which inturn was due to higher coal and furnace oil prices. Derived blended aluminium realisation fell 5% qoq to US$2,687/t but was lower than the fall of ~9% at LME. This was due to hedging aluminium at higher price as well as improved product mix. Realisations in INR terms was flat qoq due to ~5% rupee depreciation. As a result, EBITDA/t, at US$597, was down 22% qoq.
• Copper EBITDA, at Rs3.88bn, was up 16% qoq despite lower cathode volume (down 3.6% qoq to 79kt) and adverse product mix (rod was 70% of volume v/s 74% in Q1). This was due to higher volumes and prices of by-products and rupee depreciation.
• Novelis reported adj EBITDA of US$355m, up 17.5% yoy and 6.9% qoq with EBITDA/t of US$440, up 16.8% yoy and 5.6% qoq. This was primarily due to improved scrap spread and product mix, primarily in North America.

Key Positives: Novelis’s EBITDA/t of US$440; guides sustainable EBITDA of US$400/t; rupee depreciation, improved by-product prices

Key Negatives Higher CoP in aluminium

Change in estimates: Increase FY19 EBITDA by 2%, FY20 by 1% due to 4% increase in Novelis’s FY19 EBITDA and 3% in FY20

View: Reiterate Outperformer with revised TP of Rs332

Though tailwinds like higher scrap spread will not sustain but management’s guidance of sustainable EBITDA/t of US$400 for Novelis is encouraging. LME aluminium prices are under pressure (at ~US$2,000/t v/s our FY20e of US$2,150/t) but HNDL’s consol EBITDA is less susceptible to LME aluminium prices and as a result poses limited downside risk to our estimates. A US$100/t change in aluminium prices should effect ~5% change in FY20E EBITDA. The CMP factors in LME aluminium price of US$1,750/t. We reiterate Outperformer rating on the stock with a revised target price of Rs332 (earlier Rs323), valuing India business at 5.5x FY20E EV/EBITDA and Novelis at 6.5x FY20E EV/ EBITDA.