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Hindalco Industries 3QFY13 results update
Novelis, a 100% subsidiary of Hindalco Industries, posted a 13% YoY drop in adjusted EBITDA at US$185mn, below our estimate of US$231mn due to one-time costs related to implementation of enterprise resource planning (ERP) solution in North America to the tune of US$39mn. On QoQ basis, adjusted EBITDA was down 33% due to seasonality and ERP implementation costs. Novelis has raised its FY13 capex guidance from US$650mn-US$700mn to around US$750mn, while it has cut operating cash flow (OCF) before capex guidance from US$600mn- US$700mn to around US$250mn-US$300mn. Increase in working capital and pressure on profits led to a rise in total debt from US$4.46bn at the end of 2QFY13 to US$4.89bn at the end of 3QFY13. We have marginally tweaked our earnings estimates post factoring in 3QFY13 performance. We have retained our Sell rating on Hindalco Industries with an unchanged target price of Rs96.
Novelis performance update: Novelis posted a 2% YoY jump in aluminium volume at 694,000tn (in line with our estimate of 695,000tn) driven by Asia and South America regions. North American region reported a drop of 12% YoY due to volume lost on account of ERP implementation. Adjusted EBITDA/tn contracted 15% YoY to US$267, resulting in a 13% YoY fall in adjusted EBITDA. EBITDA/tn got squeezed across the broad, on YoY basis, except for the European region. On QoQ basis, EBITDA/tn improved in Asia and South America regions due to improved volume, while it was down in North America and Europe due to ERP implementation and seasonality.
Novelis guidance: The company reported a negative OCF before capex of US$116mn in 3QFY13 and a positive US$35mn in the 9MFY13 period. On account of subdued performance, the management lowered its OCF before capex guidance of US$600mn- US$700mn to US$250mn-US$300mn for FY13E. Novelis incurred a capex of US$193mn in 3QFY13 and US$538mn in the 9MFY13 period. The management has upped its capex guidance from US$650mn-US$700mn to around US$750mn due to advance payment to take advantage of incentives. The debt/EBITDA ratio deteriorated from 4.5x at the end of 2QFY13 to 5.1x at the end of 3QFY13.
Other highlights: The management has indicated that it is facing pressure on margins in the Asian region due to competition from China. European region is also witnessing pressure due to subdued demand, particularly from South European region. Novelis has lined up ERP implementation for other facilities as well and over the long run, it plans to implement ERP at the companys entire operations. Novelis has commissioned its 220,000tn cold mill facility in Brazil in December 2012. It is looking at a volume of 50,000tn-60,000tn in FY14E from this (utilisation is likely to remain low due to subdued demand rather than slow ramp-up), which is expected to improve in the coming years due to upcoming events like Football World-Cup and Olympics.
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