>HINDALCO INDUSTRIES: Beyond US$1bn EBITDA

Event: ■ 1Q FY11 Novelis results ahead of Street: Hindalco’s subsidiary, Novelis,
reported excellent results for 1Q FY11, beating Street expectations. Novelis
now appears set to reap the benefits of cost cuts, increasing demand and
growth. Hindalco remains well on track to achieve our 18% above-consensus
earnings estimates for FY11; reaffirm our Outperform and TP of Rs205.

Impact
■ Earnings showing increasing trend: Net sales of US$2.5bn were up 29%
YoY and 5% QoQ as both shipments and realisation were up. Operating
EBITDA of US$282m is up from US$42m reported last year and 38% above
US$205m last quarter. PAT of US$50m compared to a loss of US$1m in the
last quarter. The company was operating at capacity during the quarter,
reporting peak shipments. In addition, results reflected the sustainability of
cost cuts, which did not increase in line with volumes.

■ On track to achieve FY11E: Our estimate for Novelis’s FY11 EBITDA is
US$967m, which implies EBITDA-per-ton of US$336 and volume of 2.8mt. In
1Q, Novelis achieved EBITDA of US$282m and shipment volume of 0.75mt,
about 30% and 26% of our respective full year assumptions.

■ Growth plans: Novelis plans to expand its capacity by 10% in the next two
years through brownfield expansion and de-bottlenecking its existing
capacities. The company has a cash balance of US$419m and should be able
to fund its proposed capex from internal accruals.

■ Extremely bullish outlook: Management expects to exceed US$1bn of
adjusted EBITDA in FY11, and expects FCF of more than US$335m in FY11.
The company expects margin gains from operational efficiencies, product
portfolio optimisation and strong spot pricing. We are building in EBITDA of
US$967m compared with guidance of US$1bn in EBITDA.

Earnings and target price revision
■ No changes.

Price catalyst
■ 12-month price target: Rs205.00 based on a PER methodology.
■ Catalyst: Increased confidence in earnings sustainability of Novelis.

Action and recommendation
■ Maintain Outperform: We believe Hindalco offers good value and has strong
growth drivers. Around 60% of Hindalco’s earnings come from its subsidiary
Novelis, making it minimally dependent on aluminium prices. We think a
recovery in Novelis will be the key driver of earnings in FY11. From FY12
onward, it will start commissioning its three-fold increase in aluminium
capacity, which will be backed, in our view, by 200m of bauxite resources,
making Hindalco the lowest-cost producer.

■ It remains one of the least expensive stocks regionally at 9.7x FY11E, a
discount of at least 50% to peers such as Chalco (2600 HK, HK$6.69, U, TP:
HK$5.20, Christina Lee) and Alcoa (AA US, US$11.66, O, TP: US$18, Curt
Woodworth) on FY11E.

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