Stock corner: ‘Buy’ Hindalco with target price of Rs 153

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Published: November 13, 2019 1:50:03 AM

Hindalco’s Q2 India Ebitda fell 1% q-o-q as expected, but Group Ebitda rose 5% q-o-q due to strong Novelis Ebitda.

BS is strong & FCF should stay positive. At CMP, ex-aluminium business represents > 90% of market cap per our SOTP. ‘Buy’.

Hindalco’s Q2 India Ebitda fell 1% q-o-q as expected, but Group Ebitda rose 5% q-o-q due to strong Novelis Ebitda. Al fundamentals are unexciting, but prices should stay range-bound. Novelis margins (68% of Ebitda) continue to surprise positively & its outlook remains solid, in our view. Novelis may end up acquiring Aleris, ex its auto assets, which would be a negative. BS is strong & FCF should stay positive. At CMP, ex-aluminium business represents > 90% of market cap per our SOTP. ‘Buy’.

India Ebitda down 1% q-o-q, Group Ebitda +5% q-o-q: Q1 India Ebitda was Rs. 1,060 crore, in-line with our estimates. Consolidated Ebitda was Rs. 3,630 crore, up 5% q-o-q.

Al Ebitda broadly in-line: Al Ebitda (including Utkal) was Rs. 850 crore (-4% q-o-q), tad below our Rs. 860 crore estimate. Volume rose 2% q-o-q, but integrated Al Ebitda/tonne (including Utkal) fell $31/tonne q-o-q to $368/tonne (JEFe $375/tonne). Al ASP fell $62/tonne q-o-q more than fall in Al LME likely due to; lower premia on domestic sales; and tad lower mix of value-added products. Al COP ($/tonne) fell 1.5% q-o-q, mainly due to weaker rupee (flat q-o-q in rupee). HNDL now expects flat COP in H2 vs earlier guidance of 3-5% decline, mainly due to risk of higher domestic e-auction coal prices given tighter domestic coal supply.

Cu smelting Ebitda in-line: Cu TCRC Ebitda was Rs. 246 crore (-3% q-o-q, 1% beat). Cu TCRC volume was flat q-o-q, but weaker byproduct realisation and disruptions due to heavy rains in Dahej, affected Ebitda.

Novelis: Multiple drivers support strong outlook: Novelis adj. Ebitda was $374m (1% q-o-q, 7% beat), supported by a solid Ebitda/tonne of $448/tonne (JEFe $420/tonne). We believe Novelis is in a sweet spot at present as; a) despite broader auto slowdown, segments like SUV, trucks (with higher Al content) have stayed strong in the US, and Al auto sheet supply remains tight; b) shift to Al sheet from plastics, glass in beverages packaging, tighter can sheet supply is driving better demand and pricing in beverages can segment; c) scrap tailwinds are still strong in the US, though this is softening ex-US; d) better pricing in specialities due to tariffs on Chinese imports in the US; and e) constrained capacity allowing Novelis to optimise product mix.

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