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Better days ahead

Hindalco (including Utkal Alumina) reported better than expected EBITDA of Rs24.1bn (CentrumE: Rs20bn), up 30.5% QoQ primarily on account of higher aluminum realization, which in turn was due to average LME price increasing 15% QoQ and lower hedging losses being partially offset by lower volume and higher CoP. Higher working capital requirement due to higher copper prices led net debt to increase ~Rs45bn QoQ.

Hindalco’s focus on downstream expansion along with backward integration would aid margins, going forward. With capital allocation policy in order, focus on ESG, and firm outlook on aluminum prices, HNDL is one of our preferred investment picks. We value India business at 5.5x FY23E EV/EBITDA and Novelis at 7x FY23E EV/EBITDA to arrive at a TP of Rs558. Reiterate BUY.

Aluminum: Higher prices inflate EBITDA/t to USD1,052

Adj EBITDA of India aluminum segment (incl Utkal Alumina) was Rs23.5bn, up 29% QoQ (CentrumE: Rs18.3bn) due to 13% QoQ (USD315/t) growth in blended aluminum realization (USD2,804/t), which is similar to the increase in LME aluminum prices (up by USD311/t to USD2,400/t). Hedging loss was lower at Rs4bn vs Rs4.5bn in Q4FY21. Hindalco has hedged 32% of FY22E volume at USD1,913/t and 23% of FY23 volume at USD2,229/t. Sales volume declined 8% QoQ to 303kt, hit by Covid restrictions and 15kt stuck at ports. Hindalco exported more; domestic sales comprised 44% vs 50% in Q4FY21. Management mentioned that CoP of primary aluminum was up 4% QoQ and expects further 5% rise in Q2FY22 due to higher coal and CP coke prices. EBITDA/t increased by USD294 QoQ to USD1,052 (up 39% QoQ).

Copper: Lower volume and Tc/Rc margins reduce profits

Copper sales declined ~25% QoQ to 80kt due to maintenance shutdown and lower demand. Further, Tc/Rc margins remained weak (USc15.3/lb v/s USc16.03/lb in Q4FY21). As a result, EBITDA declined 19% QoQ to Rs2.61bn (CentrumE: Rs1.67bn). EBITDA/t increased 7% QoQ to USD442/t.

Consolidated net debt up Rs45bn QoQ to Rs519bn due to higher WC

HNDL’s India net debt increased by ~Rs35bn QoQ to Rs148.3bn while consolidated net debt rose by Rs45bn to Rs519bn as at Q1FY22-end. India net debt increased due to higher working capital requirement amid higher copper prices. Additional Rs10bn increase is due to translation loss. We expect consolidated net debt to reduce to ~Rs439bn in FY22E despite ongoing capex of USD600-700mn in Novelis and ~Rs27bn in India for downstream expansion.

Valuation: Reiterate BUY with a target price of Rs558

Hindalco has hedged 32% of FY22E volume at USD1,913/t and 23% of FY23E volume at USD2,229/t. In an upcycle, hedging volumes at lower price restricts earnings growth but provides downside cushion too. We have factored LME aluminum price of USD2,300/t in FY22E and FY23E (CMP: ~USD2,600/t). The aluminum CoP is expected to reduce post commissioning of 500ktpa Utkal Alumina refinery in Q2FY22, thereby improving profitability. Further, future expansion in downstream business, focus on ESG, and firm outlook on aluminum price bodes well for the company. We value India business at 5.5x FY23E EV/EBITDA and Novelis at 7x FY23E EV/EBITDA to arrive at a TP of Rs558. Reiterate BUY.

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