Research Notes - REDUCE Hindalco
Industries Posted
on 13.11.2013
Downgrade Hindalco
Industries to ‘REDUCE’ – TP Rs 90 ·
Hindalco
Industries has been downgraded to REDUCE from the earlier BUY rating and TP
has been cut to Rs 90. The stock is currently traded at Rs 115 levels ·
Hindalco’s
Q2FY14 standalone EBITDA & recurring PAT at Rs 540 Cr & Rs 230 Cr,
respectively, missed analyst estimates. ·
While
volumes in the aluminium business were higher than analyst estimates, cost
pressures led to a 33% (QoQ) decline in segment EBIT. ·
However;
providing support, copper business EBIT increased sharply QoQ, aided by good
volumes and higher spot treatment charges/refining charges (TC/RC). ·
Novelis’
reported Q2FY14 adjusted EBITDA of U$D 228 mn & recurring PAT of U$D 41 mn,
too missed analyst estimates. Adjusted EBITDA analyst estimates for FY14
already factor-in company expectations of an improved performance in H2FY14. ·
New
developments surfacing within the aluminium sector on a global scale, are read
to be more of a bane than a boon. ·
In
China, commissioning of new low-cost aluminum capacity and the trend of
allowing smelters to bypass the state grid for power purchases will lower
production costs, leading to higher output. ·
Proposed
LME rules are also likely to deliver more metal from warehouses. ·
All
of the above materialising would translate into lower realisations for
aluminum producers. ·
The
only way out for the overall industry would be to start shutting capacities
permanently, and allowing demand to catch-up & absorb global stocks. ·
Finally;
given weak industry fundamentals, the Hindalco Industries stock’s current
valuations appear expensive, and hence our downgrade to REDUCE. ·
Negative
outlook on Hindalco is also found to accommodate the regulatory trouble that the
company has run into recently, wherein the CBI has filed a charge sheet
against the company & named chairman – Mr K M Birla in the ongoing coal-block
allocation scam investigation. ·
This
would further delay approvals for Hindalco’s Mahan coal block, which would
have been a key positive catalyst as the cost of production at the Mahan
smelter would have fallen on availability of captive coal. ·
Key
risks to negative rating on Hindalco include the availability of cheaper coal
(resolution of the Mahan coal block), which would reduce power costs and make
new smelters profitable. Earlier-than-expected commissioning of projects,
higher-than-expected metal prices & further depreciation of the INR also pose
to be upside risks. |
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