>HINDALCO INDUSTRIES (KOTAK SECURITIES)

Novelis: Volume and product mix drive earnings. Novelis reported 1QFY10 adj. net loss before tax of US$29 mn compared to US$124 mn qoq and adj. net profit before tax of US$40 mn yoy. Adj. EBITDA for the quarter was at US$124 mn (+133% qoq and -43% yoy). Rolled product volumes at 650K tons were lower by 16% yoy and higher by 6% qoq. EBITDA improved across all geographies over the 4QFY09 with Asia EBITDA jumping sharply from US$3 mn to US$38 mn. We maintain our BUY on Hindalco.

Net income reconciliation – Many one-off items
Reported net income before tax of US$273 mn for 1QFY10 is unadjusted for several one-off items such as (1) unrealized gains on fair value of derivative instruments of US$299 mn,
(2) restructuring charges of US$3 mn, and (3) tax litigation settlement in Brazil of US$6 mn. After these adjustments the net loss before tax for the quarter would stand at US$29 mn. Similarly, reported net income for 4QFY09 were also impacted by several one-off items and, as against reported net income before tax of US$62 mn, the adj. net loss before tax would be US$124 mn.

Volumes pick up compared to 4QFY09
Total shipments (incl. rolled products and ingots) for the quarter were 691,000 (+6% qoq and - 16% yoy). Shipments have improved in Asian and North American geographies 1QFY10 compared to the sequential quarter, however, Europe and South American geographies reported modest declines. Key highlights of performance across geographies during the quarter are as follows:

• Asia reported the sharpest increase in volumes (+51% qoq and -2% yoy) driven by a recovery in demand in China and Korea. Segment net income at US$38 mn (+13X qoq, +23% yoy) rose sharply due to improvements in conversion premiums, conversion costs and foreign exchange measurement, which was partially offset by volume reductions.

• North American shipments at 254,000 tons (+3% qoq, -11% yoy) continue to see the impact of the economic downturn. Baring the can business volumes, shipments for most other products were below the prior years levels. Segment net income at US$57 mn (+54% qoq, +36% yoy) was lifted by a reduction in conversion costs, improved conversion premiums and a net favorable metal price lag, offsetting volume reduction impact.

• South American shipments at 81,000 tons (-5% qoq, -4% yoy) were largely stable due to a high presence in the can markets. Can shipments comprised more than 85% of total shipments. Segment net income at US$11 mn (+10% qoq, -77% yoy), were sharply impacted by sharp drop in profitability from the smelting operations which were lower by US$29 mn yoy.

• European shipments at 185,000 tons (-1% qoq, -32% yoy) continues to see the impact of the economic downturn. Segment net income at US$33 mn (+120% qoq, - 70% yoy) was impacted by lower volumes and metal price lags, which were partially offset by favorable conversion premiums, conversion costs and foreign exchange movements.

Maintain BUY
We believe that better economic conditions in the next two-three quarters will likely result in an uptick in volumes. 1QFY10 adjusted EBITDA was largely impacted by a 16% yoy decline in volumes (resulting in EBITDA decline of US$109 mn).

Traction on account of better price and volume mix and lower costs lifted earnings by US$75 mn and US$40 mn, respectively. Other major items that negatively impacted earnings were metal price lags and metal long positions, which impacted earnings by US$68 mn and US$50 mn, respectively.

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