>HINDALCO INDUSTRIES (EDELWEISS)

■ Novelis results significantly above estimates
Novelis reported adjusted EBITDA and PAT of USD 187 mn and USD 195 mn, which were much above our estimates of USD 131 mn and USD 32 mn, respectively. Novelis reported net revenues of USD 2.2 bn (in line with our estimates), down 26% Y-o-Y (up 11% Q-o-Q), largely due to 35% Y-o-Y decline in aluminium prices and 10% Y-o-Y decline in volumes.

■ EBITDA surpasses target of USD 250/tonne; USD 285/tonne sustainable
EBITDA/tonne showed (our estimate lower then company estimate due to different set of adjustments) marked improvement at USD 258/tonne from USD 165/tonne in Q1FY10 due to improved demand, better pricing and significant operational efficiencies during the quarter. It was better than our estimates and the company’s guidance. Management has guided that an EBITDA of USD 285/tonne is sustainable going forward.

■ Focus on cost efficiencies: 70% target achieved
Novelis has achieved operational efficiencies and cost reductions across regions. It has managed to reduce conversion costs by cutting down costs in labor, energy, alloys etc. On a run-rate basis, it has already achieved cost savings of USD 100 mn against target of USD 140 mn by Q2FY11 (on run-rate basis). Though current incremental savings may look moderate, Novelis continues to identify further areas for cost reductions in manufacturing and procurement.

■ Derivative losses of FY09 continue to be reversed
In FY09, with the collapse in LME prices, Novelis recorded MTM losses on its aluminium derivatives. For instance, the company recorded total unrealised losses of USD 684 mn in Q2FY09 and Q3FY09. However, this has no underlying business issue since this will eventually be offset by higher revenues from customers. In FY10, as aluminium prices are recovering and normalcy is returning, these losses are getting reversed. In H1FY10, the company has recorded unrealised gains of USD 553 mn and net gains of USD 152 mn.

■ Outlook and valuations: Strong turnaround; maintain ‘BUY’
We are encouraged by the recent multi-year contracts signed by Novelis and the price increases of USD 45/tonne which are sticking. We continue to be positive on aluminium and the results of Novelis show that demand and pricing power are returning to the industry. We are retaining our FY10 EBITDA estimate and FY11E consolidated EBITDA estimates based on H1FY10 actuals. Considering the much higher–than-expected unrealised derivative gains in H1FY10 in Novelis, we are revising up our FY10 PAT for Novelis. Our revised consolidated EPS estimate for FY10 is up at INR 16.8 from INR 9.7 earlier. We, however, keep our FY11 EPS unchanged at INR 14.8 considering that derivative gains are one-off.

Based on FY11E EV/EBITDA (6.5x for India aluminium business and 5.5x for Novelis), our fair value works out to INR 169/share. We maintain ‘BUY’ recommendation on the stock, and rate it ‘Sector Outperformer’ on relative return basis.

To read the full report: HINDALCO INDUSTRIES