MOSL: HINDALCO (Buy)- In-line-cost pressure only fraction of AL industry trend-Strong Cu performance

​Hindalco:In-line; cost pressure only fraction of AL industry trend; Strong Cu performance; Reiterate Buy

(HNDL IN, Mkt Cap USD9.4b, CMP INR269, TP INR326, 20% Upside, Buy)

• Hindalco's (HNDL) 2QFY18 standalone (S/A) EBITDA increased 20% YoY to INR13.9b (in line with our estimate), driven by margin expansion in both copper (Cu) and aluminum (AL) segments. Utkal Alumina's (100% subsidiary) EBITDA too increased by 18% to INR2b. Thus, total EBITDA of Indian (S/A+Utkal) increased 20% YoY to INR15.9b. There were EO items of INR1b toward mining, DMF, etc. Adj. PAT increased 25% YoY to INR5b, missing our estimate by 6%, due to a higher tax rate and lower other income.
  

Aluminum: Cost pressure only fraction of industry-wide trend

• ​-HNDL is largely insulated from industry trend in high input cost inflation due to its diversified source of coal supply and access to high-quality bauxite mines. Cost of production may have increased by ~USD100/t QoQ on carbon prices, which accounts for 15% of its CoP. Shipments increased 10% QoQ to 329kt.
  
• -EBITDA/t (incl. Utkal) declined 10% QoQ to USD534/t due to pricing pressure and some hedging losses. We expect EBITDA/t to increase to USD600 in subsequent quarters, as 50% of production is not hedged, while average LME is higher. Only 20% of FY19 production is hedged, which leaves room for upside.