Stock Market Result Update on Hindalco for 2QFY2012

Stock Market Result Update on Hindalco for 2QFY2012 with a Buy recommendation and a Target Price of `151 (12 months).

For 2QFY2012, Hindalco’s 2QFY2012 standalone profit was below our expectations. However, Novelis reported a robust set of numbers during 2QFY2012. We maintain our Buy rating on the stock.

Higher power costs dent standalone EBITDA margin: Hindalco’s standalone net sales increased by 7.2% yoy to `6,220cr mainly due to higher realization. However, EBITDA decreased by 4.2% yoy to `669cr on account of rising power costs, driven by increased coal prices. Thus, EBITDA margin slipped by 128bp yoy to 10.8% in 2QFY2012. Other income grew by 114.5% yoy to `176cr. Tax rate stood at 16.8% in 2QFY2012 compared to 22.0% in 2QFY2011. Consequently, net profit increased by 15.8% yoy to `503cr.

Robust performance by Novelis continues: Novelis’ net sales grew by 14.1% yoy to US$2,880mn, driven by higher realization. Shipments of rolled products decreased by 2.3% yoy to 720kt. However, EBITDA decreased modestly by 0.9% yoy to US$228mn on account of increased cost of goods sold, which grew by 16.5% yoy to US$2,549mn. The company’s tax expense stood at US$(7)mn in 2QFY2012 compared to US$56mn in 2QFY2011. Consequently, net profit grew by 93.5% yoy to US$120mn during the quarter.

Outlook and valuation: At the CMP, the stock is trading at 5.1x FY2012E and 4.8x FY2013E EV/EBITDA. We believe Hindalco is well placed to benefit from
a) its aluminium expansion plans (capacity increasing by nearly three folds in the next four years), b) low production cost at its new capacities and c) steady capacity expansion at Novelis. We maintain our Buy recommendation on the stock with an SOTP target price of `151.