Hindalco Industries' Q4FY19 results (Outperformer) - Low valuation; Novelis supports earnings

Q4FY19 result- lower aluminium prices depresses profits

Hindalco’s Indian operation reported EBITDA of Rs13.6bn, down 20.9% qoq (14% lower than IDFCe).

• Standalone aluminium EBITDA (incl Utkal Alumina) at Rs 10.4bn, was down 19% qoq primarily due to lower LME prices (down 4.9% qoq) and rupee appreciation (up 2.1% qoq). Volume, at 325kt, was up ~0.6% qoq. The effect of Lower LME aluminium prices was offset by hedging of 11% volumes at higher price. Hedging gain stood at ~Rs1.5bn during the quarter. Management informed that CoP was flat qoq (however, derived overall CoP was up ~3% qoq).. Due to lower prices, EBITDA/t was down ~18% qoq at US$455.
• Copper operations EBITDA declined by ~27% qoq to Rs3.15bn. The profitability in copper business was affected by lower Tc/Rc margins, lower by-products prices and one time provision of ~Rs800m which was related to disposal of waste.
• Consolidated net debt reduced by ~2% yoy to ~Rs392bn at FY19-end

Key Positives: Lower aluminium COP guidance in Q1YF20 (~3% qoq)

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

Change in estimates: Reduce FY20E/21E PAT by 0.9%/2.7%

View: Reiterate Outperformer with revised TP of Rs300

Amid the ongoing trade war between US & China, HNDL is relatively better placed among metal companies with ~57% of FY20 EBITDA coming from Novelis, an efficient convertor. Also, HNDL’s Indian aluminium operation, being in the first quartile of the world cost curve, can withstand the low aluminium prices. Even if we factor in average LME aluminium price of US$1,850/t in FY20E (our assumption is US$2,000/t), our FY20E India EBITDA will be only ~3% lower yoy. Novelis’s acquisition of Aleris (expected by Q2FY20-end) provide the required EBITDA growth from 2HFY20E and will be marginally earnings accretive in the first year of operation (Rs1.6/sh). HNDL is trading at 0.95x FY20E adj P/B (ex-goodwill) with adjusted RoE of 15.6%, providing minimal downside risk.  Our TP changes marginally due to higher-than-expected debt at FY19-end. We reiterate Outperformer rating on the stock with a target price of Rs300 (earlier Rs305), valuing India business at 5.5x FY20E EV/EBITDA (Rs119/sh) and Novelis at 6.5x FY20E EV/ EBITDA (Rs180/sh).