For 2QFY2016, Hindalco Industries (Hindalco)’ standalone revenues came in 3%
ahead of our expectations, but the EBITDA disappointed, coming in 16% below
our estimate. Net sales increased 4.3% yoy to Rs8,841cr, vs our expectation of a
2.5% yoy decline, led by strong increase in aluminium volumes and higher credits
from by-products in the copper division. The strong growth in volumes was diluted
substantially by the sharp slide in commodity prices. Aluminum segment revenue
increased 26% yoy whereas copper segment revenue declined 10% yoy. Copper
volume growth also partially offset the decline in realizations.
Sharp jump in employee and other expenses resulted in the EBITDA margin
coming in 180bp below our expectations at 6.8%. The EBITDA however increased
29% yoy to Rs603cr, led by lower than expected material costs. Depreciation and
finance costs jumped sharply yoy and came in marginally ahead of our
expectation. However, a sharp jump in other income on account of dividend
received from subsidiaries and a one-off of Rs119cr, led the net profit to increase
by 31% yoy to Rs103cr, well ahead of our expectation of Rs57cr.
Outlook and valuation: We expect aluminium prices to remain under pressure led
by the huge oversupply situation and the Chinese slowdown. Pressure on
realizations would continue to offset benefits from volume growth in the
aluminium business. The stock is currently trading at EV/EBITDA of 8x on an
FY2017E basis and the valuations are currently looking expensive. We remain
Neutral on the stock.

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