Beats its own best; building up for next leg of growth May 08, 2018 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Amit Khimesra amitkhimesra@plindia.com +91 22 66322244 Rating BUY Price Rs239 Target Price Rs305 Implied Upside 27.6% Sensex 35,216 Nifty 10,718 (Prices as on May 08, 2018) Trading data Market Cap. (Rs bn) 493.8 Shares o/s (m) 2,065.2 3M Avg. Daily value (Rs m) 3054 Major shareholders Promoters 34.67% Foreign 28.09% Domestic Inst. 19.11% Public & Other 18.13% Stock Performance (%) 1M 6M 12M Absolute 11.7 (9.0) 29.8 Relative 7.0 (15.0) 12.1 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 18.2 21.1 13.6 2020 19.4 24.0 19.1 Price Performance (RIC: HALC.BO, BB: HNDL IN) (Rs) 300 250 200 150 100 50 0 May 17 Jul 17 Source: Bloomberg Sep 17 Nov 17 Jan 18 Mar 18 May 18 Novelis posted strong set of earnings for Q4FY18. Adj. EBITDA rose to record high of US$319mn (PLe:US$310mn), up 9.2% YoY/4.6% QoQ. On the back of continued increase in share of rich Auto products (11% YoY increase in volumes and leadership position in the segment with market share at ~46%), margins rose to highest ever levels of US$396/t (PLe:US$385/t). Strong demand outlook in US and revival in demand in Europe/South America/Asia, aided by quality operations and sound B/S sets robust outlook for Novelis. Underpinned by firm outlook on Novelis and stable India operations (benefitting from high Aluminium prices and integrated business model), HNDL would continued to post stable earnings growth. We maintain BUY with TP of Rs305, EV/EBITDA of 7x FY20E. North America and Asia drove the show: Volumes grew 2% YoY at 805kt (PLe:804kt) on the back of 9%/2% growth in South America/North America. Led by increased share of Auto, North America s EBITDA grew 17% YoY to US$123mn with margins at ~US$450/t. Asian operation s EBITDA grew 39% YoY due to lower pricing pressure and rejig of product mix. European s ops delivered 5% growth in EBITDA at US$61mn. However, South American ops reported a fall of 7% YoY in EBITDA to US$94m due to currency gains and strong restocking demand in last year. Backed by strong operating performance, Adj. PAT rose 38.4% YoY to US$101mn (PLe:US$98mn). Key highlights of Con call: 1) Would be able to grow volumes on the back of debottlenecking and efficiency improvements 2) Will spend US$250mn on 200kt auto line in Kentucky, USA (having total capex of US$500mn), debottlenecking and IT in addition to US$200mn on maintenance 3) Don t expect much disturbance in market due to section 232 imposed by USA as company believes that nations doing fair trade would get exemptions 4) Every US$100 increase/reduction in Aluminium prices increases/reduces its working capital by US$50mn 5) Net Debt/EBITDA fell to 3x from 3.9x 6) Looking actively to increase capacity in Auto segment through inorganic route 7) The gearing could increase to 3.5x in the initial period of acquisition however it will settle down to 3x over 18 24 months of deal. Key financials (Y/e March) 2017 2018 2019E 2020E Revenues (Rs m) 1,001,838 1,185,053 1,267,220 1,313,422 Growth (%) 1.4 18.3 6.9 3.6 EBITDA (Rs m) 124,359 142,456 147,256 150,067 PAT (Rs m) 19,041 50,055 40,569 43,181 EPS (Rs) 8.5 22.5 18.2 19.4 Growth (%) 60.3 162.9 (19.0) 6.4 Net DPS (Rs) 1.1 1.2 1.3 1.3 Profitability & Valuation 2017 2018 2019E 2020E EBITDA margin (%) 12.4 12.0 11.6 11.4 RoE (%) 4.4 10.3 7.7 7.6 RoCE (%) 5.2 7.6 6.7 6.7 EV / sales (x) 1.1 0.9 0.8 0.7 EV / EBITDA (x) 8.7 7.2 6.9 6.5 PE (x) 28.0 10.6 13.1 12.3 P / BV (x) 1.2 1.0 1.0 0.9 Net dividend yield (%) 0.5 0.5 0.5 0.5 Source: Company Data; PL Research Event Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Rising trajectory of EBITDA/t US$/t 405 395 385 375 365 355 345 335 325 396 383 377 370 368 355 352 349 340 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Exhibit 2: North America and Asia drove the EBITDA growth 140 North America Europe Asia South America US$mn 120 100 80 60 40 20 0 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 May 08, 2018 2
Exhibit 3: Strong outlook on Aluminium demand with growth across the user sectors Exhibit 4: Product wise mix and rising share of high margin Auto segment May 08, 2018 3
Exhibit 5: Q4FY18 Result Overview (US$ m) Y/e March Q4FY18 Q4FY17 YoY gr. (%) Q3FY17 FY18 FY17 YoY gr. (%) Net sales 3,066 2,621 17.0 3,085 11,614 9,591 21.1 EBITDA 316 304 3.9 294 1,190 1,096 8.6 % of sales 10.3 11.6 9.5 10.2 11.4 Depreciation 87 93 (6.5) 86 354 360 (1.7) EBIT 229 211 8.5 208 836 736 13.6 Interest 63 63 64 255 294 (13.3) Other (income)/expenses (2) (32) 6 (9) (71) PBT before extraordinary 164 116 41.4 150 572 371 54.2 Extraordinary income/ (expense) (1) (28) (25) 284 (166) PBT after extraordinary 163 88 85.2 125 856 205 Tax 54 41 31.7 20 233 151 54.3 PAT 109 47 131.9 105 623 54 Equity in Share in (profit)/loss of affiliates (1) (8) Minority interest 3 (16) (13) 1 Net profit attributable to shareholders 106 47 125.5 121 635 45 Adjusted net profit attributable to shareholders 101 73 38.4 138 420 233 80.3 Sales volume (000 tonnes) 805 789 2.0 796 3,188 3,067 3.9 Adjusted EBITDA (US$m) 319 292 9.2 305 1,215 1,085 12.0 Adjusted EBITDA per tonne 396 370 7.1 383 381 354 7.7 Operation wise earnings North America Volumes (kt) 273 269 1.5 269 1,089 1,010 7.8 Adjusted EBITDA (US$m) 123 105 17.1 111 474 380 24.7 Adjusted EBITDA/tonne (US$) 451 390 15.4 413 435 376 15.7 Europe Volumes (kt) 236 235 0.4 222 930 943 (1.4) Adjusted EBITDA (US$m) 61 58 5.2 50 219 208 5.3 Adjusted EBITDA/tonne (US$) 258 247 4.7 225 235 221 6.8 Asia Volumes (kt) 174 174 177 711 690 3.0 Adjusted EBITDA (US$m) 43 31 38.7 43 167 163 2.5 Adjusted EBITDA/tonne (US$) 247 178 38.7 243 235 236 (0.6) South America Volumes (kt) 136 125 8.8 146 523 474 10.3 Adjusted EBITDA (US$m) 94 101 (6.9) 107 363 337 7.7 Adjusted EBITDA/tonne (US$) 691 808 (14.5) 733 694 711 (2.4) May 08, 2018 4
Income Statement (Rs m) Net Revenue 1,001,838 1,185,053 1,267,220 1,313,422 Raw Material Expenses 556,614 723,229 776,897 806,996 Gross Profit 445,224 461,824 490,323 506,426 Employee Cost 85,460 87,392 93,877 97,514 Other Expenses 235,406 231,976 249,190 258,845 EBITDA 124,359 142,456 147,256 150,067 Depr. & Amortization 44,572 44,536 47,942 50,032 Net Interest 57,424 50,005 47,558 44,698 Other Income 11,039 27,636 11,213 11,425 Profit before Tax 33,400 75,551 62,969 66,763 Total Tax 14,326 25,119 21,954 23,083 Profit after Tax 19,074 50,431 41,015 43,679 Ex Od items / Min. Int. (469) (137) (78) (35) Adj. PAT 19,041 50,055 40,569 43,181 Avg. Shares O/S (m) 2,227.2 2,227.2 2,227.2 2,227.2 EPS (Rs.) 8.5 22.5 18.2 19.4 Cash Flow Abstract (Rs m) C/F from Operations 126,875 99,547 119,007 125,652 C/F from Investing (27,885) 753 (45,113) (32,031) C/F from Financing (55,523) (120,892) (81,708) (79,110) Inc. / Dec. in Cash 43,467 (20,593) (7,814) 14,512 Opening Cash 38,753 82,220 71,627 47,563 Closing Cash 82,220 71,627 47,563 62,075 FCFF 100,461 56,852 30,267 61,759 FCFE 63,222 (11,148) (733) 30,759 Key Financial Metrics Growth Revenue (%) 1.4 18.3 6.9 3.6 EBITDA (%) 43.7 14.6 3.4 1.9 PAT (%) 74.2 162.9 (19.0) 6.4 EPS (%) 60.3 162.9 (19.0) 6.4 Profitability EBITDA Margin (%) 12.4 12.0 11.6 11.4 PAT Margin (%) 1.9 4.2 3.2 3.3 RoCE (%) 5.2 7.6 6.7 6.7 RoE (%) 4.4 10.3 7.7 7.6 Balance Sheet Net Debt : Equity 1.2 1.0 0.9 0.8 Net Wrkng Cap. (days) (12) 3 4 Valuation PER (x) 28.0 10.6 13.1 12.3 P / B (x) 1.2 1.0 1.0 0.9 EV / EBITDA (x) 8.7 7.2 6.9 6.5 EV / Sales (x) 1.1 0.9 0.8 0.7 Earnings Quality Eff. Tax Rate 42.9 33.2 34.9 34.6 Other Inc / PBT 33.2 17.9 17.8 17.1 Eff. Depr. Rate (%) 4.3 4.2 4.3 4.4 FCFE / PAT 332.0 (22.3) (1.8) 71.2. Balance Sheet Abstract (Rs m) Shareholder's Funds 460,588 507,756 545,176 584,944 Total Debt 637,515 569,515 538,515 507,515 Other Liabilities 39,411 42,946 47,004 51,441 Total Liabilities 1,137,513 1,120,217 1,130,694 1,143,900 Net Fixed Assets 696,073 678,420 703,054 696,478 Goodwill 171,350 171,350 171,350 171,350 Investments 151,575 141,318 141,057 140,790 Net Current Assets 110,017 120,631 106,736 126,785 Cash & Equivalents 82,612 72,019 47,956 62,467 Other Current Assets 354,998 376,602 399,326 411,671 Current Liabilities 327,592 327,991 340,546 347,354 Other Assets 8,498 8,498 8,498 8,498 Total Assets 1,137,513 1,120,217 1,130,694 1,143,900 Quarterly Financials (Rs m) Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18E Net Revenue 97,700 103,082 110,228 118,092 EBITDA 11,477 13,899 13,117 14,434 % of revenue 11.7 13.5 11.9 12.2 Depr. & Amortization 3,792 3,804 3,822 3,840 Net Interest 4,878 4,836 4,828 4,830 Other Income 2,563 1,872 2,994 2,800 Profit before Tax 4,327 6,076 6,307 8,564 Total Tax 1,431 2,146 2,552 2,912 Profit after Tax 2,896 3,930 3,755 5,652 Adj. PAT 3,595 4,612 4,442 5,652 Key Operating Metrics Aluminium (Al) prod (t) 1,266,000 1,276,000 1,276,000 1,276,000 Copper (Cu) prod (t) 376,403 400,000 400,000 400,000 LME Al (USD/t) 1,688 2,030 2,100 2,150 LME Cu (USD/t) 5,152 5,800 6,000 6,200 Novelis (volumes kt) 3,067 3,190 3,253 3,319 Novelis EBITDA/t (US$) 357 382 385 385 Novelis EBITDA (US$ mn) 1,096 1,218 1,253 1,278. May 08, 2018 5
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