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Strength in aluminium prices augurs well…

About the stock: Hindalco is the world’s largest aluminium company by revenues, and a major player in copper. Its wholly owned subsidiary Novelis is the world’s largest producer of aluminium beverage can stock.

* Over the years, Hindalco has transformed its business model to reduce dependence on the volatile LME price movement and is focusing on a stable portfolio of value added produces

* Novelis has leveraged its extensive recycling footprint and favourable market conditions to increase its recycled content to 61% in FY21

Rationale: Strong aluminium prices coupled with healthy performance from Novelis augurs well for Hindalco.

* Global aluminium prices on the LME witnessed a sharp rally during the current calendar year. Aluminium prices on the LME have increased from US$2028/tonne in January 4, 2021 to US$3149/tonne on October 15, 2021, indicating an increase of 55% in the period. Increase in aluminium prices augurs well for an integrated player like Hindalco (domestic operations)

* In the last few quarters Novelis has been reporting a healthy performance, which has aided Hindalco’s consolidated performance. Going forward, on the back of healthy demand from key user industries we upward revise Novelis’ EBITDA/tonne estimate to US$525/tonne each for both FY22E & FY23 (earlier estimate of US$500/tonne each for both FY22E, FY23E)

What should investors do? Hindalco’s share price has grown by ~3.5x over the last five years (from ~| 155 on October 2016 to ~| 543 levels in October 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Hindalco at | 650, based on SoTP valuation

Key triggers for future price performance:

* Global aluminium prices witnessed a sharp rally over the last few quarters and Hindalco is well placed to reap the benefit of the same

* Going forward, during FY21-23E we expect Hindalco’s consolidated revenue to grow at a CAGR of 16.8% while ensuing EBITDA and PAT are likely to register a CAGR of 26.3% and 58.1%, respectively

Alternate Stock Idea: In our metal sector coverage, we also like Tata Steel.

* India’s share in Tata Steel’s overall consolidated production capacity has risen from 29% in 2010 to 57% in 2020 and is likely to reach 73% in 2030

* BUY with a target price of | 1750

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