Upgrade Hindalco to ‘buy’ as steady rise on RoE ensured

By: |
May 26, 2021 8:14 AM

Net debt increased by ~ Rs 80bn YoY. Higher commodity prices will lead to higher working capital requirement and may lead to higher ND/EBITDA numbers for Q1FY22E.

HindalcoOnly with sustained Aluminium prices at higher levels over couple of years, and certainty of competitive domestic power prices will allow management to seriously contemplate smelter expansion.

Net debt has reduced by Rs 64bn QoQ. ND/TTM conso EBITDA at 2.6x. Of US$1090mn of domestic capex scheduled for next 5 years, Hindalco plans to spend Rs27bn in FY22 (against Rs 16bn YoY). Net debt increased by ~ Rs 80bn YoY. Higher commodity prices will lead to higher working capital requirement and may lead to higher ND/EBITDA numbers for Q1FY22E.

Aluminium sales surprised at 329kte (expected 315 kte). Higher value added sales lead to higher realised premium; higher costs though didn’t allow for the integrated spreads to increase – margin increase at US$102/te QoQ was in line with LME (adj. for hedges) and MJP growth QoQ. Higher domestic sales (50% of the mix) and higher value added sales (at 28% of the mix) drove higher premium realisation. Significantly high linkage mix of 93% helped power costs – normalisation (back to 75%) is expected in Q1FY22.

Copper EBITDA surprised despite a muted TcRc. Low TcRc is manifesting in sharp decline in premiums realized. Copper EBITDA fell by only US$30/te QoQ, partly shielded by an increase in copper sales – up nearly 47% QoQ to 107kte. Q1FY22 performance will be impacted by low demand and lower rod sales – higher copper prices being partly responsible.

Reinforces that upstream capex is last in priority; upgrade to BUY. The cost of power in India not being competitive compared to hydro power driven/Chinese smelters, the ESG headwinds behind setting up a coal based power plant and the volatility of LME despite Chinese Aluminium cuts are some of the reasons for the relegated priority of smelter expansion. Only with sustained Aluminium prices at higher levels over couple of years, and certainty of competitive domestic power prices will allow management to seriously contemplate smelter expansion. This shows commitment to

5 year strategic vision i.e. downstream organic expansion, deleveraging and shareholder return – in that order.
We upgrade to BUY, as the commitment, will ensure a steady increase in RoE and P/B.

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