CLSA Research has maintained underperform rating on Hindalco Industries with a slightly higher revised price target of Rs 145 based on our weak outlook for both aluminium prices and copper TC/RCs over FY2008-09.
Novelis reported 1QFY2008 recurring EBITDA at USD104 million (6% up yoy), higher than our expectations. The operational improvement was driven by product-mix improvements; drop in proportion of sales under price caps to 10% and lower corporate expenses. 1Q results were also boosted by a USD44 million accretion to P&L from contract loss reserves. This lowered the impact of the USD80 million of metal purchase costs that Novelis was unable to pass through on sales under these contracts. Higher depreciation expenses and acquisition-related extraordinary items resulted in a net loss for 1Q at USD151 million. The company expects better performance in the balance quarters of FY2008 and also expects to turn operating cash flow positive in 2Q.
Higher reported EBITDA going forward; but no cash impact
Under the 'purchase accounting' method followed for the Novelis acquisition, Hindalco has created USD655 million of reserves to account for future losses under price cap contracts. These reserves will be accreted to the P&L over the life of these contracts and will eventually come down to zero when all such contracts expire. This will result in higher reported EBITDA for Novelis going forward. In fact, reported EBITDA could potentially spike significantly in case aluminium price fall below the price that has been used to calculate losses on these contracts (not disclosed). However, this will not impact future cash flows for Novelis.
Upgrading estimates; maintain Underperform on the stock
We upgrade our cons EPS estimates for Hindalco 8% for FY2008 to Rs23.2 and 13% for FY2009 to Rs20.0 to account for lower P&L impact of the price-cap contracts going forward. We note that these estimates will change materially depending of the financing structure that will replace the USD3.1 billion of bridge loans taken to fund the acquisition. We treat the contract loss reserves as debt and consequently don't see much change in our EV/EBITDA based valuation for Hindalco despite the increase in reported EBITDA. We maintain our Underperform rating on the stock with a slightly higher revised price target of Rs 145 based on our weak outlook for both aluminium prices and copper TC/RCs over FY2008-09.
Novelis reported 1QFY2008 recurring EBITDA at USD104 million (6% up yoy), higher than our expectations. The operational improvement was driven by product-mix improvements; drop in proportion of sales under price caps to 10% and lower corporate expenses. 1Q results were also boosted by a USD44 million accretion to P&L from contract loss reserves. This lowered the impact of the USD80 million of metal purchase costs that Novelis was unable to pass through on sales under these contracts. Higher depreciation expenses and acquisition-related extraordinary items resulted in a net loss for 1Q at USD151 million. The company expects better performance in the balance quarters of FY2008 and also expects to turn operating cash flow positive in 2Q.
Higher reported EBITDA going forward; but no cash impact
Under the 'purchase accounting' method followed for the Novelis acquisition, Hindalco has created USD655 million of reserves to account for future losses under price cap contracts. These reserves will be accreted to the P&L over the life of these contracts and will eventually come down to zero when all such contracts expire. This will result in higher reported EBITDA for Novelis going forward. In fact, reported EBITDA could potentially spike significantly in case aluminium price fall below the price that has been used to calculate losses on these contracts (not disclosed). However, this will not impact future cash flows for Novelis.
Upgrading estimates; maintain Underperform on the stock
We upgrade our cons EPS estimates for Hindalco 8% for FY2008 to Rs23.2 and 13% for FY2009 to Rs20.0 to account for lower P&L impact of the price-cap contracts going forward. We note that these estimates will change materially depending of the financing structure that will replace the USD3.1 billion of bridge loans taken to fund the acquisition. We treat the contract loss reserves as debt and consequently don't see much change in our EV/EBITDA based valuation for Hindalco despite the increase in reported EBITDA. We maintain our Underperform rating on the stock with a slightly higher revised price target of Rs 145 based on our weak outlook for both aluminium prices and copper TC/RCs over FY2008-09.
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