Hindalco industries ltd. the metals flagship company of Aditya Birla Group, is among the global leaders in aluminium and copper manufacturing. In India, the Company’s aluminium units envelop the gamut of operations from bauxite mining, alumina refining, coal mining, captive power generation and aluminium smelting to downstream value addition of aluminium rolling, extruding and foil making. Its copper facility houses one of the world’s largest custom smelter with its downstream facilities. It produces copper cathodes and continuous cast copper rods along with other byproducts. Novelis Inc., Hindalco’s wholly-owned subsidiary in US, is the leading producer of flat-rolled aluminium products and the world's largest recycler of aluminium. It provides innovative solutions in beverage cans,automobiles and specialty markets.

At a CMP of Rs.180.2, Hindalco stock is trading at EV/EBITDA multiple of ~5x which is available at discount as compared to its global average EV/EBITDA of 5.7x. This is not justifiable as per our view and we shall argue that Hindalco should receive higher multiple of ~6x on consolidated basis as ~65% of its revenue comes from stable downstream business and Company’s diversified business model is capable of reducing the impact from volatility arising out of the LME price movements as 70% of EBITDA in FY19 was non-LME linked. We have used SOTP valuation to calculate our target price and arrived at a target price of Rs. 270 per share.

LME Aluminium impacting domestic, Novelis continue to lead growth: Q4FY19 aluminum metal sales volumes stands at 1,274 KT and was in line with Q4FY18, however EBITDA (incl Utkal) fell by 18% to Rs 10.4bn due to continuous decline in LME prices, down 12% YoY. In copper business, Q4 EBITDA was impacted by lower volumes in copper cathodes due to planned maintenance shutdown, however it was offset by high volumes led by capacity expansions in CC Rod (51% volume growth) and DAP fertilizer (130% volume growth) on account of which copper business Q4FY19 EBITDA de-growth restricted to 4% at Rs 3.15bn. Novelis (which contributes around 60% to group EBITDA) recorded 12% growth in EBITDA (Rs 91.9bn), as a result of 12% growth in shipments, while EBITDA per ton increased to 410, 4% up YoY. On full year basis, Hindalco’s consolidated revenue grew by 13% YoY to Rs 1305.4bn, EBITDA grew by 11% to Rs 166.2bn, while PAT (adjusted for exceptional items) grew by 22% YoY to Rs 55.0bn.

Strategic capital investments to boost group earnings: Brownfield expansion of Utkal Alumina by 500 KT (Rs 13bn) is on track and is expected to be commissioned by FY21. This will take alumina capacity of Utkal from 1.5 million tons to 2 million tons per annum. Further, the management reiterated its guidance of closure of the Aleris acquisition by end-Q2FY20. Moreover, the management announced a capacity addition of 200kt of an automotive finishing line in US. Hindalco’s strategic investments across upstream and downstream segments should start contributing to its top and bottom line from Q2FY21. [see Table 1] Focus on growing downstream: Company’s objective is to double the domestic downstream production i.e. from 300 KT to 600KT over next 5 years. This would contribute additionally USD 150 per ton of EBITDA on 600KT of metal on the top of normal metal EBITDA. The downstream business is delinked to the direct LME movement impact as LME price is a pass through and therefore this will act as a key catalyst for company’s overall margins. Company has earmarked $1-1.2 Billion for downstream product expansion in India over the next five to six years.

Planned hedging reducing risk in current LME price trend: In declining aluminium LME price scenario Hindalco has capped the downward price risk by hedging 15% of the aluminium at $2225 per ton for FY2020 out of which 11% is rupee LME hedged and 4% is only commodity at $2,421 per ton. Also they have 30% of the currency hedged for the year at 75.25. This planned hedging holds well in current scenario where spot LME aluminium prices are subdued and hovering around ~US$1780/tonne. Further also, majority of its copper Tc/Rc are on contracts which augurs well as reduced concentrate output and surge in demand from Chinese smelters may adversely affect Tc/Rc values in CY19 on the spot level.

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