Buy stocks of Hindalco Industries; target of Rs 151

“Hindalco consolidated topline for the year FY12 at Rs 808 bn, up 12% from FY11. EBITDA for the year was up only 3% owing to higher raw material costs (up 35%). This was partially compensated by higher other income (up 52%), lower finance costs (down 4%) and lower tax rate of 18% (25% for FY11). PAT improved 38% YoY to Rs 34 bn. The company changed its policy with respect to actuarial valuation of long term employee benefits at Novelis resulting in an adjustment of Rs. 10 bn in reserves and surplus rather than showing it as an expense. Similarly an amount of Rs 5.36bn was adjusted in "business reconstruction reserve". Further profit of Rs 0.6bn in FY11 from Idea Cellular which could not be incorporated in results then has now been considered.”

“Q4FY12 performance of Novelis remained in line, with rolled product shipments for the quarter higher at 703 kt. Adj. EBITDA/tonne was almost flat at US$ 331 for Q4FY12, while for the full year it came at a record high of US$ 371. While expanding in most of the existing geographies it is also entering into China with a focus on its value added segments, while selling off its commodity business segments e.g. foils. The FCF before capex stood at US$614 mn. For FY13 the company expects EBITDA of US$1.06bn, FCF (before capex) of US$600- 700 mn, whereas total capex is pegged at US$650- 700 mn. Standalone performance was better than expected with APAT of Rs 6.4 bn, down 10% YoY but up 42% QoQ. EBITDA margin though down 205 bps YoY, improved by 55 bps QoQ to 11.3%. Topline growth of 12% YoY and 15% QoQ to Rs 76.5 bn was primarily due to higher volume (copper up 11% and aluminium up 4% on QoQ basis) and weak INR. We believe Mahan smelter to start contributing from late FY14.”

“At CMP of Rs 115, the stock is available at 6.2xFY14E EPS, 6.6xEV/EBITDA and 0.6xFY14E P/B. Though FY13 looks challenging, we expect value unlocking in FY14. Valuing the company on SOTP basis (5.5x standalone and 6x Novelis FY14EV/EBITDA), we arrive at a target price of Rs 151; Retain Buy,” says Emkay Global Financial Services research report.