Hindalco Industries' Q3FY19 results (Outperformer) - Firm Outlook, Inexpensive Valuation

Q3FY19 result- Cost in-control, lower prices hit profits

• Hindalco’s Indian operation reported lower-than-expected results due to lower volumes, adverse product mix and lower prices. It reported EBITDA of Rs. 17.2bn, up 6.7% yoy but down 1.2% qoq (10% lower than IDFCe).
• Standalone aluminium EBITDA (incl Utkal Alumina) at Rs 12.9bn, was down 4.7% qoq and EBITDA/t was Rs39,814, down 3.8% qoq. This was due to lower derived aluminium realisation (down 1% qoq to Rs186,316/t). Volume, at 323kt, was down 1% qoq. The effect of Lower LME prices (down 4% qoq) was offset by hedging of 11% volumes at higher price and 3% rupee depreciations v/s USD. Despite coal shortage in the country, HNDL managed to keep its CoP low (down ~Rs1,000/t qoq).
• Copper EBITDA, at Rs4.31bn, was up 11% qoq due to higher cathode volume (up 25% qoq to 99kt) partially offset by adverse product mix (rod was 58% of volume v/s 70% in Q2), lower TC/RC margins (USD/lb of 21.98 v/s USD/lb 23 in Q2FY19) and lower volumes of by-products.

Key Positives: Cost control, Copper Rod production ramp-up

Key Negatives: Lower aluminium prices, Lower TC/RC margins

Change in estimates: No EBITDA change; Introduce FY21 Estimate

View: Reiterate Outperformer with TP of Rs305

HNDL has hedged ~15% of FY20 aluminium volume at ~US$2198/t (CMP of LME aluminium is US$1,875/t).  Stable aluminium volume, cost control and 15% volume hedging at higher prices is expected to offset lower aluminium prices to a great extent. Moreover, higher volume and improved product mix in copper is expected to increase FY20 EBITDA of Indian operation by ~5% yoy to Rs75bn. We have factored in average LME price of US$2,000/t in FY20. Novelis, too, is expected to report a stable EBITDA in FY20 despite macro headwinds. Also, as HNDL’s earnings are less susceptible to LME aluminium prices (~65% of EBITDA is contributed from conversion business i.e. Copper and Novelis), hence, poses limited downside risk to our estimates. A US$100/t change in aluminium prices should effect ~5% change in FY20E EBITDA. Moreover, HNDL will subscribe only Rs6.5bn in proposed rights issue of Vodafone-idea to maintain HNDL’s 2.61% stake in it. We reiterate Outperformer rating on the stock with an unchanged target price of Rs305, valuing India business at 5.5x FY20E EV/EBITDA and Novelis at 6.5x FY20E EV/ EBITDA.