Hindalco Industries' Q3FY20 results (Outperformer) - Aluminium profitability improves; Novelis’s best ever Q3 earnings

Q3FY20 result- Aluminium improves, copper disappoints

HNDL reported consol EBITDA of Rs37.3bn, flat qoq led by higher profits from India aluminium business which inturn was due to lower cost.

• Hindalco Standalone (Incl Utkal Alumina) reported higher than expected adj EBITDA of Rs12.1bn (IDFCe: Rs10.8bn), up ~12% qoq primarily due to lower aluminium production cost and savings (Rs430m) on regulatory change owing to renewable power obligations in Odisha.
• Novelis reported in-line operating results with EBITDA of US$343m (IDFCe: US$335m), up 6.5% qoq (down 8.3% qoq) on the back of portfolio optimisation and cost efficiencies offset by lower recycling benefits due to lower aluminium prices. It reported EBITDA/t of US$430, up 6.9% yoy (down 3.9% qoq).
• Adj. EBITDA from India aluminium segment (Incl. Utkal) stood at Rs9.53bn, up 23% qoq (IDFCe: Rs8.3bn) due to ~5% qoq decline in CoP (derived CoP was US$1,932/t) which inturn was due to higher linkage coal (69% of requirement v/s 60% in Q2) and lower other RM cost, partly offset by lower aluminium realisation (down 2% qoq to US$2,340/t). As a result, EBITDA/t was up 22% qoq to US$408.
• Copper operations’ EBITDA declined 16.3% qoq to Rs2.56bn.The profitability in copper business was affected by lower Tc/Rc margins, adverse product mix partly offset by higher DAP volumes. EBITDA/t stood at US$428, down 19% qoq.

Key Positives: Lower aluminium COP; increased Novelis’s sustainable EBITDA/t guidance from US$400 to US$420-440

Key Negatives: Lower aluminium price, TC/RC margins

Change in estimates: Increase FY20 EBITDA by 2.7% to factor in higher profitability of Novelis and lower aluminium CoP in India

View: Reiterate Outperformer with TP of Rs259

Management’s increased sustainable EBITDA/t guidance on Novelis is encouraging. Besides, aluminium CoP in India is on a downward trend, offsetting fall in aluminium prices. 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. Copper earnings will slow down in FY21 due to lower Tc/RC margins. We factor in average aluminium LME price of 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 (Rs191/sh) while India business at 5.0x FY21E EV/EBITDA (Rs68/sh) to arrive at a TP of Rs259.  This provides a minimal downside to Hindalco’s share price. Risk reward is favourable. Reiterate Outperformer.