We have a 'buy' rating on Hindalco Industries Ltd shares with a target price of Rs 110, which is based on the sum-of-the-parts methodology that values standalone/Novelis at 5x/6x FY15e EV/Ebitda.
Novelis’ Q1FY14 was operationally below expectations. The company’s Q1FY14 adjusted Ebitda at $204 million (-15% q-o-q and -21 % y-o-y) was below UBS-e of $236 million.
Rolled product shipments at 7.08 lakh tonne (+1% q-o-q and -2% y-o-y) were marginally below UBS-e at 7.25 lakh tonne. Hindalco Industries adjusted Ebitda/t was lower at $288 per tonne (-16% q-o-q and -17% y-o-y) vs UBS-e of $325 per tonne. Free cash-flow before capex was $108 million, driven by semi-annual bond payment of $107 million and higher working capital due to higher inventory. PAT at $14 million (-76% q-o-q and -85% y-o-y) was below UBS-e of $61 million.
The operational performance was below expectations due to a) higher open capacity, coupled with lower can demand in the North American market b) unfavourable regional pricing premium in Asia, coupled with higher open capacity in China due to slower growth c) weakness in the specialty segments in Europe and d) one-time employee plan amendment of $14 million. However, significant scrap benefits offset some of the negatives. The company's expansion plans are on track. Around 1 lakh tonne of incremental sales is expected in FY14 due to recent commissioning of projects at Korea, Brazil and the US.