Better days ahead; present valuations are unjustified given the prospects; ‘Buy’ retained with TP of Rs 230
Hindalco India (Hindalco) reported a resilient Q1FY21, driven predominantly by better than expected performance from aluminium, offset by weaker than expected copper. India operations reported an adjusted Ebitda of Rs 9.6 bn (-17% y-o-y), broadly in line with HSBCe. Notwithstanding a 5% drop in shipments (303kt), 17% lower LME prices ($1,498/t) and lower premiums (due to 55% y-o-y fall in VAP volumes and higher exports), aluminium continued to surprise positively, posting Ebitda of Rs 8.5 bn (flat y-o-y). The aluminium segment continued to benefit from lower coal costs as well as a Rs 300-m write back of renewable power obligations (RPO).
Copper was slightly weaker than expected as a sharp volume fall and lower by-product realisations resulted in the segment reporting adjusted Ebitda of Rs 1.1 bn (adjusted for Rs 0.7 bn derivative loss).
Better days ahead: Aluminium prices have defied weak fundamentals, rising by 20% in the past three months to trade at $1,750/t. While we expect prices to correct (we expect FY21 prices to average at $1,564/t), HNDL has hedged 58% of volumes for the remaining 9MFY21 at $1,720/t. HNDL’s superior hedging strategy coupled with recovery in domestic demand should help improve realisations for the segment. At the same time, costs are expected to remain flat in Q2, which should support margins for the segment.
Although copper production was severely hit by COVID-19 disruptions (-46% y-o-y) in Q1, the smelters are now operating at optimal capacity and mgmt expects volumes to normalise in Q2.
A compelling investment case: HNDL has doubled from the bottom hit on 4 March, 2020. We, however, believe there are more legs to the run-up as improving show by Hindalco India operations and encouraging outlook from Novelis, should help the stock rerate. HNDL’s EV/Ebitda multiple rebounded sharply but still trades at a discount to its long term average. We believe lower valuations are unjustified given HNDL’s relatively de-risked business model and rising earnings certainty. We retain our Buy rating and TP of Rs 230, implying upside of c25%.