Hindalco Industries - Valuations discount slow pace of earnings growth - Avendus

We cut our consolidated net profit estimate by 9.4% due to reduction in our volume estimate for FY13f-FY14f by 7.5%, weak demand in the overseas market and higher interest outflow. However, revenue estimates have been revised upwards due to INR depreciation. The borrowing estimate has been raised by cINR70bn on lower internal accruals and higher borrowings for its Orissa project. Our FY14f EPS estimate has been downgraded by up to 16% on equity dilution. We rollover our TP to Sep13 and cut it to INR122. We value HNDL at a 20% discount to the historical average P/E and EV/EBITDA, as aluminium demand stays weak in domestic and international markets. Upgrade to Add on recent stock price correction.

Lower volume, higher cost in 1QFY13 leads to EBITDA downgrade

We cut our EBITDA estimate for standalone operations by c11% due to a reduction in our FY13f-FY14f volume estimate by 7.5% and higher power costs. We maintain our realisation estimates, as a lower aluminium price is offset by a 14% INR depreciation against the USD, which rose from cINR49 in Feb12 to cINR56 in Aug12. Furthermore, Japanese aluminium premiums went up from USD121/tonne in the quarter ended Jun12 to USD210/tonne in the quarter ending Sep12. Production cuts by global majors are likely to maintain the premiums at higher levels, offsetting the decline in LME prices.

Earnings momentum in overseas subsidiary likely to be weak

Demand in the European markets continued to remain weak, despite rising aluminium premiums due to production cuts. This led us to lower our volume estimate and adjusted EBITDA from USD1.06bn to USD1.00bn for FY13f. We forecast Novelis sales volumes at 3.05mn tonnes compared to our earlier estimate of 3.10mn tonnes. The adjusted EBITDA/tonne is likely to be at USD330 in FY13f and USD345 in FY14f.

Lower internal accruals, project delays lead to higher borrowing

We raise our FY13f-FY14f borrowings forecast by cINR70bn due to lower-thanestimated internal accruals and the ongoing delay in projects, including the commissioning of the Mahan Aluminium project. Higher-than-estimated borrowings constitute c11% of the enterprise value and have been one of the key factors for the recent stock price correction.

Valuations discount slow pace of earnings growth; upgrade to Add

We value HNDL at a 20% discount to the historical average (Sep09-Aug12) EV/EBITDA of 8x and P/E of 11.3x. This accounts for the project commissioning delay and slow pace of the FY13f-FY15f volume CAGR of 1.5% in the domestic business. The stock price correction seems to consider 1QFY13's weak domestic performance and the EPS estimate downgrade on a 7% equity dilution. We upgrade our rating on the stock to Add and cut our TP to INR122 due to an earnings downgrade, as we rollover to Sep12. Risks to our earnings are the project delays and lower-than-estimated volumes with weak aluminium prices.

Source : Equity Bulls

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