Hindalco Industries' Q3FY18 results (Outperformer) - Improved hedging prices for aluminium
Q3FY18 result- Higher aluminium prices offset cost increase
- Hindalco’s Q3FY18 operating performance reflects the lower impact of hedging. As a result, despite CoP of aluminium increasing by ~3% qoq, higher aluminium prices led EBITDA/t to increase by 3% qoq to US$565. The management guides 28% of FY19E aluminium volume has been hedged at aluminium price of ~US$2,200/t (CMP of US$2,225/t) and CoP should peak-out in Q4FY18 which implies improved margins in FY19E.
- Aluminium EBITDA (standalone + Utkal Alumina) came at Rs 11.9bn, up 3% qoq (6% higher than IDFCe) due to higher blended realisation (up 2.7% qoq to US$2,532/t offset marginally by higher CoP (up ~3% qoq) EBITDA/t at US$565 was up 3% qoq due to reduced effect of hedging. We infer that HNDL’s aluminium realisation was hit by ~US$30/t due to hedging. The management guides no further incremental hit on hedging in Q4FY18 which is positive. Power cost is flat qoq.
- EBITDA of its copper division was Rs 4.2bn, down 10% qoq as Q2 earnings was inflated due to favourable currency movement. We expect EBITDA to remain flat qoq in Q4FY18E.
- Other income of Rs3bn, up 60% qoq includes ~Rs450m gain on loan revaluation.
Key Positives: Higher aluminium EBITDA/t despite cost pressure; reduced effect of hedging; 28% of FY19E volume hedged at US$2,200/t and above; CoP of aluminium to peak-out in Q4FY18
Negatives: High aluminium CoP in Q3FY18
Impact on financials: introduce FY20e numbers
Valuation & view: Remain our top pick with revised TP of Rs346
With clarity emerging on aluminium hedging volume and prices in FY19 and its CoP peaking out soon, we expect HNDL India operations EBITDA to increase by 29% yoy to Rs78bn in FY19E. Moreover, Novelis’s sustainable EBITDA guidance of USD375-380/t provides comfort on its future earnings. The company will start its capex plans in value addition and alumina expansion only which is a positive. We have not factored in any probable acquisition by Novelis in our estimates. We maintain Hindalco as our top pick. We rollover our valuation to FY20e earnings and arrive at a TP of Rs346 (earlier Rs322). We value the India operations at 6.5x FY20E EV/EBITDA and Novelis at 7.0x FY20E EV/EBITDA.
Hindalco Industries is engaged in the production and sale of aluminum and copper in India and internationally. Co.'s aluminum products include rolled products, extrusions, foils, primary aluminum ingots, billets, wire rods, and aluminum slabs; and aluminum chemicals, such as standard alumina, standard hydrate and specialty aluminas and hydrates for use in refractories, ceramics, fire retardant plastics, alum, and zeolite applications. Co. also offers aluminum foil and packaging solutions to pharmaceuticals, healthcare, dairy, confectionery, processed foods, personal products, and tobacco industries, as well as to the heat, ventilation, and air conditioning industries.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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