We met Hindalco (HNDL) MD Satish Pai to size up the company’s strategic initiatives. Our key takeaways are: 1) focus on downstream and value-added products; 2) efforts afoot to make consolidated EBITDA ‘LME independent’ up to 80%; 3) aluminium (Al) macro environment remains conducive with potential risks priced in at current LME Al price; and 4) no major expansion for the next two years in upstream until Aleris is integrated.
We believe the company would benefit greatly from the favourable mix of cost-efficient upstream operations and ‘LME-independent’ overseas operations.
The acquisition of Aleris at an attractive valuation is an important milestone in HNDL’s journey —overseas downstream operations’ foothold in the aerospace segment would complement its global leadership in the auto segment.
Besides, HNDL’s earnings would get increasingly independent of LME volatility due to Novelis and Aleris. Management believes that it might take almost two years to integrate Aleris, implying HNDL will be in a consolidation phase until then.
We are positive on the stock as: 1) more than 70% of consolidated EBITDA is expected to be LME-neutral; 2) VAP would drive domestic business’s incremental growth; and 3) net debt/EBITDA to be maintained less than 3x post-Aleris consolidation in two years.We are upbeat on the HNDL stock in light of management’s focus on downstream products and the increasingly neutral earnings impact to LME cyclicality. On revised USD:INR estimates, our FY19E/FY20E EBITDA has risen 13% each while we trim the domestic multiple to 6.5x as we expect an unfavourable macro environment to suppress valuations. Maintain ‘Buy’ with revised TP of Rs 307, implying exit multiple of 6.6x FY20E EBITDA.