>HINDALCO INDUSTRIES

The Devil Is In The Details, We retain Sell 


Hindalco’s FY12 consolidated EBITDA was 4.6% above our expectation at Rs81,894mn, while PAT was 23.8% above our estimate largely due to lower tax rate and higher EBITDA. PBT was 12% higher than our estimate, while the effective tax rate for the year stood at 18.1% as compared to our estimate of 20.8% and last year’s tax rate of 25.1%. Besides this, there was a substantial increase in the leverage, with consolidated net debt/equity jumping from 0.73x to 1.02x due to increased capex as well as rupee transactions of foreign subsidiaries in a falling currency environment. A detailed analysis reveals that FY12 PAT and EBITDA has been overstated by Rs12,775mn and Rs15,512mn with the company routing certain expenses through reserves and surplus and booking some prior period income during the year. We continue to retain our Sell rating with a target price of Rs107 on Hindalco. 


Routing costs through business reconstruction reserve: Hindalco had created business reconstruction reserve (BRR) in FY09 for adjustment of certain specified expenses. During FY12, it booked Rs5,363mn of other expenses from this reserve. Consequently, tax expense was higher by Rs359mn and PAT was up by Rs5,005mn. 


Actuarial gains/losses accounted for in balance sheet rather than P&L account: With effect from FY12, the company changed its accounting policy in respect of gains/losses arising out of actuarial valuation of long-term employee benefits and post-employment benefits relating to one of its overseas subsidiaries (Novelis). Until FY11, the actuarial gains/losses were accounted for in the P&L account, but following the change in the accounting policy these gains/losses along with related deferred tax were adjusted against reserves and surplus. As a result, employee expenses were lower by Rs10,149mn, tax expenses higher by Rs2,999mn, net profit higher by Rs7,150mn and reserves and surplus higher by Rs444mn. 


Prior period income: Following exceptional circumstances, the accounts of Idea Cellular, an associate company of Hindalco, were not available for FY11. The consolidated accounts for FY12 include Rs620mn as Hindalco’s share of profits made by Idea Cellular in FY11, thereby leading to FY12 PAT being higher by the said amount. 


Balance sheet update: Consolidated net debt in FY12 increased from Rs213bn to Rs327bn, while standalone net debt rose from Rs36bn to Rs93bn. Standalone net fixed assets increased from Rs136bn to Rs234bn, largely driven by the capex on Utkal refinery and Mahan/Aditya aluminium units in FY12, while consolidated net fixed assets jumped from Rs327bn to Rs470bn primarily due to higher standalone capex, increased capex at Novelis and translation of foreign assets in a falling rupee environment. Goodwill on consolidation rose from Rs89bn to Rs111bn.


To read report in detail: HINDALCO INDUSTRIES

RISH TRADER