Published on 16/09/2019 11:24:49 AM | Source: Motilal Oswal Services Ltd

Buy Hindalco Ltd For Target Rs.239 - Motilal Oswal

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Lower LME, copper shutdown impacts performance

Valuations attractive; Maintain Buy

1QFY20 (Standalone + Utkal) EBITDA at INR11.4b (v/s est. of INR10.9b) was down 16% QoQ on lower LME prices and plant shutdown in the copper business. Finance cost rose 8% QoQ (6% YoY) to INR4.9b. Other income decreased 65% QoQ (+43% YoY) on a high base (which includes MTM gains). Adj. PAT was down 63% QoQ (- 74% YoY) to INR1.9b (v/s est. INR1.8b).

* Aluminum EBITDA/t decreased 12% QoQ to USD400 (est. USD365) on lower realization (LME was lower ~USD70), partly offset by lower costs. Aluminum production and sales remained largely stable QoQ at 326kt (+2%) and 320kt (- 2%), respectively. Aluminum EBITDA was down 15% QoQ to INR8.9b.

* Aluminum CoP was lower USD49 QoQ on the back of lower coal and carbon costs. CoP is expected to reduce further as lower caustic and oil prices seep in.

* Copper production/sales were down 15%/18% QoQ to 76kt/82kt on the back of planned maintenance shutdown. This, along with lower LME and by-product volumes, led to 20% QoQ decline in Copper EBITDA to INR2.5b.


Robust business with attractive valuations; Maintain Buy

* With slowing global demand and continuing tariff wars, aluminum LME continues to be on a downward trend. However, at current LME prices, more than 10% of global aluminum smelters would be in losses. We believe this is unsustainable. Given its low-cost integrated production, HNDL is well placed to benefit as LME recovers. Net debt to EBITDA is comfortable at below ~3x.

* Novelis should drive growth through investment in high margin auto-rolled products. Aleris acquisition is strategic and value accretive, in our view, and should be FCF positive at margin. The stock trades attractively at 5.4x EV/EBITDA and 8.1x PE on FY21E. Our TP is INR239/share. Maintain Buy.


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