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Hindalco Industries' Q4FY18 results (Outperformer) - Improved hedging prices, cost control to boost earnings

Q4FY18 result- Aluminium segment strengthens

• Hindalco’s Q4FY18 operating performance reflects the lower impact of hedging. As a result, despite CoP of aluminium increasing by ~6% qoq, higher aluminium prices led EBITDA/t to increase by 3% qoq to US$580. The management guides 28% of FY19E aluminium volume has been hedged at aluminium price of ~US$2,100/t assuming INR/USD of 66 and 12% at US$2,270/t (CMP: ~US$2,300/t) and CoP has peaked-out in Q4FY18 which implies improved margins in FY19E.
• Aluminium adj EBITDA (standalone + Utkal Alumina) came at Rs 12.0bn, up 1% qoq due to higher blended realisation (up 5.3% qoq to US$2,667/t offset by higher CoP (up ~6% qoq). EBITDA/t at US$580 was up 3% qoq due to reduced effect of hedging. The reported EBITDA of Rs12.65bn includes Rs650m of stripping expenses which has been depreciated. Coal cost is flat qoq while power & fuel cost was up 4% qoq due to use of high priced LDO in lieu of furnace oil in alumina refinery at Renukoot.
• EBITDA of its copper division was Rs3.3bn, down 22% qoq due to lower DAP volume on account of operational issues which now has been resolved and lower premium on copper products. Management guides quarterly EBITDA run rate of Rs3.5-3.75bn.Q1FY19 should be low due to shutdown of copper smelter in mid-June for ~40 days.

Key Positives: Sustain aluminium EBITDA/t despite cost pressure; reduced effect of hedging; 40% of FY19E volume hedged at ~ US$2,150/t; CoP of aluminium peaks-out in Q4FY18; Consol net debt reduced by 16% yoy to Rs393bn (net debt/ebitda of 2.8x)

Negatives: High aluminium CoP in Q4FY18

Impact on financials: No change in EBITDA

Valuation & view: Remain our top pick with TP of Rs346

We expect HNDL India operations EBITDA to increase by 23% yoy to Rs78bn in FY19E, driven by higher aluminium prices, peaking of CoP and higher proportion of value added aluminium & copper. HNDL’s subsidiary, Novelis, may go for inorganic acquisition but the management’s commentary on not increasing net debt/Ebitda beyond 4.0x (FY18 net debt/Ebitda is 2.9x) provides a much needed comfort that it will not go for any high priced acquisition. We have not factored in any probable acquisition by Novelis in our estimates. We maintain Hindalco as our top pick. We value the India operations at 6.5x FY20E EV/EBITDA and Novelis at 7.0x FY20E EV/EBITDA and arrive at a TP of Rs346.