Hindalco Industries' Q2FY20 results (Outperformer) - Novelis provides stability to earnings

Q2FY20 result- Novelis led 2.3% qoq EBITDA growth

HNDL reported consolidated EBITDA of Rs37.2bn, up 2.3% qoq led by 3.6% qoq growth in Novelis’s EBITDA (~71% of total EBITDA).

• Hindalco Standalone (Incl Utkal Alumina) reported lower than expected adj EBITDA of Rs10.6bn (IDFCe: Rs11.3bn), down ~3% qoq primarily due to lower aluminium realisation.
• Adj. EBITDA from India aluminium segment (Incl. Utkal) stood at Rs8.2bn, down 2.8% qoq (IDFCe:Rs9.1bn) due to ~3% qoq  decline  in realisation, offset by  ~2% decline in derived CoP (US$2,038/t) and ~2.5% increase in volumes to 328,000t. Decline in realisation was due to lower LME aluminium price (down 1.5% qoq), higher discounts in domestic market and higher exports (50% in Q2FY20 vs 46% in Q1FY20) leading to derived realisation of US$2,392/t. We have adjusted Rs310m spent of Muri site restoration in EBITDA (company classifies it as exceptional item). As a result, EBITDA/t was down 6.5% qoq to US$354.
• Copper operations’ EBITDA declined by 2.8% qoq to Rs2.46bn.The profitability in copper business was affected by lower Tc/Rc margins and lower by-product prices partly offset by higher DAP volumes (50,000t, up 39% qoq). Volumes stood flat qoq at 82,000t. EBITDA/t stood at US$426, down 4% qoq.

Key Positives: Lower aluminium COP guidance for 2HFY20

Key Negatives: Lower aluminium price, TC/RC margins

Change in estimates: Reduce FY20/FY21 EBITDA by ~2.6%/1% due to cut in LME aluminium prices offset by increase in Novelis EBITDA/t (refer change in estimates)

View: Reiterate Outperformer with TP of Rs259

HNDL’s ~65% of FY21E EBITDA comes from Novelis, which has been growing at a steady pace, negating lower aluminium price effect on Indian operation. Though short term outlook on aluminium prices are weak but as ~18% of world aluminium producers are still making cash losses (acc to Rusal), we believe any positive development in ongoing trade war between US and China  can boost aluminium prices positively (CMP: USD1,800/t). We factor in USD 1,825/t LME aluminium prices in 2HFY20 and USD1,900/t in FY21. A USD100/t change in aluminium price will affect our TP by ~8%. We value Novelis at 6.0x FY21E EV/ EBITDA (Rs189/sh) while India business at 5.0x FY21E EV/EBITDA (Rs70/sh) to arrive at a TP of Rs259.  This provides a minimal downside to Hindalco’s share price. Risk reward is favourable. Reiterate Outperformer.