Equity Research INDIA

November 3, 2018
BSE Sensex: 35012
Hindalco Industries HOLD
ICICI Securities Limited Maintained
is the author and
distributor of this report Q2FY19 highlighted the external risks Rs240
Reason for report: Q2FY19 result review and earnings revision
Hindalco Industries (Hindalco) reported higher than expected standalone EBITDA
Metals print driven by better cost performance in the aluminium segment, while Novelis
disappointed despite many tailwinds. Novelis was expected to enjoy the benefits
Target price Rs229 of higher scrap less LME spreads in North America, which we feel largely
explains the swell-up in the region’s profitability. Yet, marginally lower than
Earnings revision expected volumes (807kte vis-à-vis the expected 812kte) and lower EBITDA/te
(%) FY19E FY20E driven by Asia resulted in the miss. Incrementally, the imperative to draw a
Revenue ↑ 2.5 ↑ 4.2
EBITDA ↑ 10.2 ↑ 5.1
tradeoff between risks and margins should drive strategy and next few quarters
PAT ↑ 21.7 ↑ 11.3 are key for the same, before completion of Aleris acquisition drives up leverage
as well as portfolio risks. Currently, Net Debt to EBITDA for Novelis stands at a
Target price revision comfortable 2.8x. Hindalco (standalone) has till date focused on deleveraging
Rs229 from Rs216 (reduced ~Rs100bn over last four years). Management continues to reiterate a
limited capex of Rs50bn over the next few years in downstream facilities.
Shareholding pattern Maintain HOLD, with a target price of Rs229.
Mar Jun Sep
’ 18 ’ 18 ’ 18  Standalone numbers surprise on aluminium cost performance. Hindalco
Promoters 34.7 34.7 34.7 (standalone) numbers were higher than estimates while Utkal reported a broadly in-
Institutional
investors 47.2 46.9 47.0 line print. As expected, the aluminium business has witnessed >US$300/te of
MFs and UTI 11.1 11.1 12.0 sequential EBITDA decline due to lower aluminium prices as well as higher costs;
FIs and Banks 0.2 0.2 0.1
Insurance Cos. 7.8 8.7 8.7 nevertheless, the decline was lower than expected, mainly due to surprise on power
FIIs 28.1 26.9 26.2 costs. Scrap imports is yet to impact premiums meaningfully, but the risk needs to
Others 18.1 18.4 18.4
be mitigated, potentially through higher downstream investments (potentially
Source: NSE
inorganic). Notably, Hindalco has been doing MoUs across states to expand its
downstream capability. Copper operations surprised somewhat negatively due to
larger than expected impact of shutdowns, as benefits of higher premiums and
Price chart
higher DAP / sulphuric acid realisations (up nearly 33% YoY) were all expected
300 tailwinds.
250  Novelis Q2FY19 a miss, given the expected tailwinds; strategic imperative will
200 be key to watch out. Novelis reported Q2FY19 numbers lower than expectations,
(Rs)

150 with reported (10-Q) EBITDA at US$352mn against our expected US$402mn.
100 Scrap less LME spreads along with pent-up auto shipments since Q1FY19 helped
50 the company’s North American operations as evident from the US$78/te QoQ
0 increase in segmental EBITDA witnessed in the region during Q2FY19. Asia
Nov-15

Nov-16

Nov-17

Oct-18
May-16

May-17

May-18

revenues were lower than expected, due to maintenance shutdowns. As we have

noted earlier, Novelis has systematically pruned the proportion of can volumes in
the overall product mix. Also, perhaps from a stated proportion of desired auto
volumes that the management has been highlighting, it is time to think of a minimum
proportion of can volumes that Novelis needs to maintain over a longer time as a
risk mitigation strategy. We feel the company has to relook its risk profile vis-à-vis
potential margins given the changing market dynamics.
Market Cap Rs540bn/US$7.4bn Year to March FY17 FY18 FY19E FY20E
Reuters/Bloomberg HALC.BO/HNDL IN Revenue (Rs mn) 10,01,838 11,51,717 13,69,638 14,15,179
Shares Outstanding (mn) 2,245.4 Net Income (Rs mn) 18,997 61,301 59,625 52,250
52-week Range (Rs) 280/196 EPS (Rs) 8.5 27.5 26.8 23.4
Free Float (%) 65.3 % Chg YoY NM 222.7 (2.7) (12.4)
FII (%) 26.2 P/E (x) 28.2 8.7 9.0 10.2
Research Analysts:
Daily Volume (US$/'000) 34,219 CEPS (Rs) 28.6 48.2 48.7 45.8
Abhijit Mitra Absolute Return 3m (%) 16.2 EV/E (x) 9.8 8.2 6.3 6.9
abhijit.mitra@icicisecurities.com
+91 22 6637 7289 Absolute Return 12m (%) (10.8) Dividend Yield (%) 0.5 0.6 0.6 0.6
Rohan Jain Sensex Return 3m (%) (5.5) RoCE (%) 7.8 8.9 10.0 8.6
rohan.jain@icicisecurities.com Sensex Return 12m (%) 5.5 RoE (%) 4.4 8.9 10.6 8.5
+91 22 6637 7510
Please refer to important disclosures at the end of this report
Hindalco Industries, November 3, 2018 ICICI Securities
Table 1: Hindalco (standalone) result snapshot
% Chg % Chg
(Rs mn) Q2FY19 Q2FY18 YoY Q1FY19 QoQ
Net Sales 1,08,330 1,03,082 11.9 1,05,932 8.9
Raw material consumed 63,673 60,761 15.4 65,712 6.7
Stock adjustment (1,574) (1,685) (5,605)
Total raw material expenses 62,099 59,076 18.7 60,107 16.7
Employee expenses 5,110 4,784 0.3 4,691 2.3
Manufacturing expenses (power & fuel) 17,058 15,083 12.5 15,058 12.7
Other expenses 13,155 10,242 31.2 12,823 4.8
Total expenditure 97,423 89,184 18.1 92,679 13.7
EBITDA 10,907 13,899 (28.0) 13,253 (24.5)
-Copper estimated 3,879 4,670 (9.8) 3,352 25.6
-Aluminum estimated 7,440 9,570 (39.4) 10,111 (42.6)
-Elimination/others (412) (341) (210)
Margin (%) 10.1 13.5 12.5
Other income 2,012 1,872 (35.9) 1,055 13.8
Interest 4,242 4,836 (13.2) 4,108 2.2
Depreciation 4,001 3,804 5.2 4,043 (1.1)
PBT 4,676 6,076 (50.4) 6,157
Tax expense 904 1,242 1,241
Exceptional items - - -
PAT reported 3,085 3,930 (46.3) 4,135 (51.1)
PAT adjusted 3,085 3,930 (46.3) 4,135 (7.3)
OCI (6,752) (4,135) (10,420)
TCI (3,667) (205) (6,285)
Source: Company data, I-Sec research

Table 2: Hindalco (standalone) volumes summary

% Chg % Chg
Volumes summary Q2FY19 Q2FY18 YoY Q1FY19 QoQ
Aluminium business
Primary aluminium 326 329 -0.9 300 8.7
Alumina (standalone + Utkal) – production 701 712 -1.5 695 0.9
Copper business
Copper cathode 79 93 -15.1 82 -3.7
Source: Company data, I-Sec research

Table 3: Hindalco (standalone) segmental summary

% Chg % Chg
(Rs mn) Q2FY19 Q2FY18 YoY Q1FY19 QoQ
Segment revenue
Aluminium 61,351 52,130 17.7 55,919 9.7
Copper 47,097 50,968 (7.6) 50,057 (5.9)
Less: Inter-segment revenue (118) (16) (44)
Revenue from operations 1,08,330 1,03,082 5.1 1,05,932 2.3
Segment results
Aluminium 7,440 9,570 (22.3) 10,111 (26.4)
Copper 3,879 4,670 (16.9) 3,352 15.7
EBITDA 11,319 14,240 (20.5) 13,463 (15.9)
Less: Finance costs 4,242 4,836 4,108
Add: Other unallocated Income 1,602 1,537 845
Profit before exceptional items and taxes 8,679 10,941 (20.7) 10,200 (14.9)
Source: Company data, I-Sec research

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Hindalco Industries, November 3, 2018 ICICI Securities
Table 4: Novelis’ Q2FY19 result snapshot
(US$ mn, year ending March 31)
Q2FY19 Q2FY18 % Chg YoY Q1FY19 % Chg QoQ
Effective net sales 3,136 2,794 12.2 3,097 1.3
COGS 2,657 2,361 12.5 2,591 2.5
% of Net sales 84.7 84.5 83.7
Selling, general & administrative 127 124 2.4 119 6.7
% of Net sales 4.0 4.4 3.8
EBITDA 352 309 13.9 387 (9.0)
Margin (%) 11.2 11.1 12.5
EBITDA/te (rolled shipments) 436 385 13.2 486 (10.2)
Depreciation & amortisation 86 91 (5.5) 86 -
R&D expenses 17 16 6.3 15 13.3
Interest expenses 68 64 6.3 66 3.0
Others 38 87 (254) NM
Profit before tax and minority interest 180 423 (57.4) 190 (5.3)
Provision (benefit) for taxes on loss 64 116 53 20.8
Loss before minority interests’ share 116 307 137 (15.3)
Minority interests share - - - NM
Net income (loss) 116 307 (62.2) 137 (15.3)
Source: Company data, I-Sec research

We continue to believe that reduction / addition of unrealised derivative gains /

losses from EBITDA, as indicated by the management, will understate the operating
income in good times and overstate it during bad times. Adjusted EBITDA
reported for Q2FY19 is US$352mn, up 14% YoY.

Table 5: Novelis’ regional EBITDA and profitability

US$ mn Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
North America 92 110 116 124 111 123 119 151
EBITDA/te 372 409 425 453 413 457 434 512
Europe 39 42 57 51 50 61 61 59
EBITDA/te 172 179 243 215 202 247 263 258
Asia 37 28 44 37 43 43 55 47
EBITDA/te 226 161 244 206 240 243 314 280
South America 83 102 72 90 107 94 97 98
EBITDA/te 542 816 655 687 582 644 770 778
Total 251 279 289 302 311 321 332 355
Source: Company data, I-Sec research

Chart 1: Q2FY19 – adjusted EBITDA bridge

Source: Company data, I-Sec research

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Hindalco Industries, November 3, 2018 ICICI Securities

Q2FY19 conference call takeaways

Hindalco
 Aluminium: EBITDA of aluminium including Utkal was up 13% YoY at Rs
13.64bn in Q2 FY19 vs Rs 12.04bn in Q2FY18, on account of better macros and
stable realisations (average LME in Q2FY19 was US$2,055/te vs US$2,010/te in
Q2FY18) despite pressure on input costs. On QoQ basis, EBITDA fell from
Rs15.31bn on account of lower LME prices and higher input costs (alumina, coal
and furnace oil). The quarter witnessed 326kte of primary aluminium production,
flat both QoQ and YoY.
 Alumina: Alumina production in Q2FY19 stood at 701kte vs 712kte in Q2FY18
and 695kte in Q1FY19. YoY drop in production was due to subdued production in
Utkal as a result of heavy rains.
 Copper: Copper segment EBITDA stood at Rs3.88bn in Q2FY19 vs Rs4.67bn in
Q2FY18, down 17%, due to planned maintenance shutdown for 33 days in
Q2FY19 and lower realisations. Cathode production was down to 72kte in Q2
FY19 vs 96kte in Q2FY18 and 81kte in Q1FY19, due to the planned maintenance
shutdown for 33 days in Q2FY19. DAP production got back to normal at 88kte in
Q2FY19 vs 51kte in Q2FY18 and 70kte in Q1 FY19. Copper premium in the
domestic market has increased since Nov’17, especially since the closure of
Vedanta’s copper smelter.
 Input costs. Coal and furnace oil costs continued to rise during Q2FY19 along
with higher alumina costs leading to a QoQ drop in overall EBITDA. Coal
price/mn-kcal was 12% higher QoQ. Management expects coal costs to be stable
in the next few quarters, in line with the coal shortage witnessed from Coal India
and a simultaneous surge in demand. Management also believes that alumina
and other input costs have peaked out and should not cross current levels.
Management also believes LME aluminium price has bottomed out at levels of
US$2,000/te.
 Coal mix. The company used 4.1mnte of coal in Q2FY19, of which 1.2mnte was
captive coal, 2.6mnte came from coal linkages and the rest from e-auctions and
washeries.
 Debt. Net debt to EBITDA multiple improved to 2.47x, from 2.67x in Q4FY18. In
Q2FY19, debt at the consolidated level stood at Rs420bn, which was higher due
to increased working capital Standalone debt including Utkal was at Rs173bn.
Company prepaid Rs15.75bn of loans in Oct’18, which adds up to a total
standalone deleveraging of ~Rs100bn in the last four years, in line with its
deleveraging goal.
 Interest costs. Interest costs were lower both YoY due to prepayment and long-
term pricing of loans.
 Hedging. For H2FY19, 27% of volumes are hedged on upward LME market at
Rs141,800/te and 11% of volumes at US$2,277/te. Management does not plan to
have any incremental hedges next year at current levels, as it believes LME
aluminium prices have bottomed out and should only rise from here.

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Hindalco Industries, November 3, 2018 ICICI Securities
Novelis
 Better profitability: Novelis’ Q2FY19 adjusted EBITDA witnessed a sharp rise to
US$355mn (up 18% YoY, from US$302mn) led by positive metal mix and scrap
spreads due to favourable market conditions, continued operational efficiencies
and higher shipments of premium products, partially offset by lower priced can
contracts. North America had substantial rise in profitability due to favourable
product mix, pricing improvement and higher volumes. It also benefitted from the
current trade war and imposition of duty on import. Europe profitability declined
QoQ as it had to settle for lower contracted pricing in cans segment. Trade war
led to a decline in the company’s profitability in China. Also, the China facility
completed a preventive maintenance programme, post which ramp-up to normal
levels has taken time, which affected volumes.
 Capex: Company maintains its capex guidance at US$450mn in FY19 out of
which US$200mn is expected to be sustenance capex and the rest for strategic
projects.
 Outlook: The company plans to continue to change mix by shifting from low-
margin businesses (e.g. speciality business) to higher-margin domains (e.g.
increasing exposure to Asia and automotive segment). Overall EBITDA/te of
US$400 is sustainable as per the management at least for the next few quarters
(it was ~US$430/te for H1FY19).
Table 6: Hindalco (standalone) + Utkal
(Rs mn)
% Chg % Chg
Particulars Q2FY19 Q2FY18 YoY Q1FY19 QoQ
Revenue from operations 10,833 10,313 5.0 10,670 1.5
EBITDA:
Aluminium 1,364 1,204 13.3 1,531 (10.9)
Copper 388 467 (16.9) 335 15.8
Others 170 154 10.4 85 100.0
Total EBITDA 1,922 1,825 5.3 1,951 (1.5)
Profit before exceptional items and Tax 968 792 22.2 1,007 (3.9)
Exceptional income/(expenses) (net) - (94) -
Profit after tax 725 470 54.3 734 (1.2)
Source: Company data, I-Sec research

Earnings change
We factor-in a higher INR/USD rate for FY19/FY20 at Rs70 (Rs68 earlier). This has
led to higher estimates of realisation for both aluminium and copper businesses with
subsequent rise in input costs, e.g. coal and alumina.

Table 7: Earnings change table

(Rs mn)
New Old % Chg
FY19E FY20E FY19E FY20E FY19E FY20E
Sales 13,69,638 14,15,179 13,36,032 13,58,604 2.5 4.2
EBITDA 1,62,100 1,50,282 1,47,152 1,42,990 10.2 5.1
PAT 59,625 52,250 48,996 46,930 21.7 11.3
Source: Company data, I-Sec research

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Hindalco Industries, November 3, 2018 ICICI Securities

Valuation methodology and key risks

We maintain our valuations based on FY20 estimates. We value Aleris asset at 6.5x
FY20E EV/EBITDA as against 7.2x ascribed by the acquisition terms, resulting in a
negative contribution. We value the aluminium and copper businesses of Hindalco at
5.5x EV/EBITDA, keeping in line with recent global peer multiples. We have
maintained Novelis’ FY19E capex at US$450mn. Higher aluminium prices remain the
key risk to our estimates. Maintain HOLD on Hindalco with a revised target price of
Rs229/share (earlier: Rs216).

Table 8: Valuations (new)

(Rs mn)
Entity Assigned EV/E multiple FY20E

Hindalco Aluminium (Including Utkal Alumina) 5.5 2,82,101

Birla Copper 5.5 87,918
Novelis 6.5 5,10,114
Combined debt-cash-investment+minority interest 3,87,322
Equity value 4,92,811
SoTP value (Rs/share) 221
Equity investments @ 20% discount 15
Target price (Rs/share) 236
Negative value attributed on account of Aleris (8)
Final target price (Rs/share) 229
Source: I-Sec research

Table 9: Valuations (old)

(Rs mn)
Entity Assigned EV/E multiple FY20E

Hindalco Aluminium (Including Utkal Alumina) 5.5 2,67,702

Birla Copper 5.5 91,524
Novelis 6.5 4,91,043
Combined debt-cash-investment+ minority interest 3,85,233
Equity value 4,65,037
SoTP value (Rs/share) 209
Equity investments @ 20% discount 15
Target price (Rs/share) 224
Negative value attributed on account of Aleris (8)
Final target price (Rs/share) 216
Source: I-Sec research

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Hindalco Industries, November 3, 2018 ICICI Securities

Financial summary (consolidated)

Table 10: Profit & loss statement Table 12: Cashflow statement
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E
Operating Income (Sales) 10,01,838 11,51,717 13,69,638 14,15,179 Operating Cashflow 51,927 1,07,331 99,029 91,852
Operating Expenses 8,77,359 10,12,510 12,25,317 12,77,121 Working Capital Changes 26,438 (17,440) (71,966) (54,807)
EBITDA 1,24,479 1,39,207 1,62,100 1,50,282 Capital Commitments (3,125) (45,627) (44,589) (33,715)
% margins 12.4 12.1 11.8 10.6 Free Cashflow 75,240 44,264 (17,526) 3,330
Depreciation & Amortization 44,688 46,065 48,925 49,763 Cashflow from Investing
Gross Interest 57,424 39,107 34,579 34,335 Activities (32,789) 57,834 10,485 33,702
Other Income 11,110 11,046 9,521 10,160 Issue of Share Capital 33,501 2 - -
Recurring PBT 33,477 65,080 88,117 76,345 Buyback of shares - - - -
Add: Extra ordinaries - - - - (1,23,840
Less: Taxes 14,326 20,042 27,220 23,293 Inc (Dec) in Borrowings (27,984) ) 96,501 (73,063)
Less: Minority Interest (174) 290 944 474 Dividend paid (2,860) (3,640) (3,640) (3,640)
Net Income (Reported) 18,997 61,301 59,625 52,250 Extraordinary Items - - - -
Recurring Net Income 18,997 61,301 59,625 52,250 Chg. in Cash & Bank
Source: Company data, I-Sec research balances 45,108 (25,381) 85,820 (39,670)
Source: Company data, I-Sec research
Table 11: Balance sheet
(Rs mn, year ending March 31) Table 13: Key ratios
FY17 FY18 FY19E FY20E (Year ending March 31)
Assets FY17 FY18 FY19E FY20E
Total Current Assets 4,11,623 4,60,598 6,69,794 6,94,820 Per Share Data (Rs)
of which cash & cash eqv. 82,612 80,578 1,66,398 1,26,727 EPS(Basic Recurring) 8.5 27.5 26.8 23.4
Total Current Liabilities & Diluted Recurring EPS 8.5 27.5 26.8 23.4
Provisions 2,84,365 3,17,934 3,69,344 3,79,233 Recurring Cash EPS 28.6 48.2 48.7 45.8
Net Current Assets 1,27,258 1,42,664 3,00,450 3,15,586 Dividend per share (DPS) 1.1 1.4 1.4 1.4
Investments 1,84,815 1,38,027 1,37,063 1,13,521 Book Value per share (BV) 177.6 246.1 270.8 292.4
Strategic/Group 15,663 147 147 147
Other Marketable 1,69,152 1,37,880 1,36,916 1,13,374 Growth Ratios (%)
Net Fixed Assets 6,93,657 6,93,219 6,88,883 6,72,835 Operating Income 19.4 3.1 11.8 3.3
Capital Work-in-Progress 18,139 20,629 22,756 22,756 EBITDA 41.2 11.8 16.4 (7.3)
Goodwill 1,71,350 1,78,294 1,78,294 1,78,294 Recurring Net Income NM 135.2 35.2 (12.9)
Total Assets 11,77,079 11,52,204 13,04,690 12,80,237 Diluted Recurring EPS NM 222.7 (2.7) (12.4)
Diluted Recurring CEPS 44.2 68.6 1.1 (6.0)
Liabilities
Borrowings 6,96,108 5,72,267 6,68,768 5,95,705 Valuation Ratios (x)
Deferred Tax Liability 20,321 31,333 31,333 31,333 P/E 28.2 8.7 9.0 10.2
Minority Interest 62 86 1,030 1,505 P/CEPS 8.4 5.0 4.9 5.2
Equity Share Capital 2,227 2,229 2,228.90 2,229 P/BV 1.4 1.0 0.9 0.8
Face Value per share (Rs) 1 1 1 1 EV / EBITDA 9.8 8.2 6.3 6.9
Reserves & Surplus 3,93,545 5,46,289 6,01,330 6,49,466 EV / Operating Income 1.0 0.9 0.7 0.7
Net Worth 4,60,588 5,48,518 6,03,559 6,51,695 EV / Operating FCF 23.4 10.7 10.4 11.3
Total Liabilities 11,77,079 11,52,204 13,04,690 12,80,237
Source: Company data, I-Sec research Operating Ratios (%)
Raw Material/Sales 47.0 56.2 72.3 73.0
SG&A/Sales 12.7 12.4 3.3 3.2
Other Income / PBT 33.2 17.0 10.8 13.3
Effective Tax Rate 42.8 30.8 30.9 30.5
NWC / Total Assets 3.8 5.4 10.3 14.8
Inventory Turnover (days) 93.2 88.7 76.6 86.1
Receivables (days) 24.9 27.2 35.0 43.0
Payables (days) 112.5 108.6 102.4 107.0
D/E Ratio (x) 1.56 1.10 1.16 0.96

Profitability Ratios (%)

Net Income Margins 1.6 3.6 4.4 3.7
RoCE 7.8 8.9 10.0 8.6
RoNW 4.4 8.9 10.6 8.5
Dividend Payout Ratio 12.9 5.1 5.2 6.0
Dividend Yield 0.5 0.6 0.6 0.6
EBITDA Margins 10.5 11.4 11.8 10.6
Source: Company data, I-Sec research

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 Hindalco Industries, November 3, 2018 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

ANALYST CERTIFICATION
ANALYST CERTIFICATION
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