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Indian aluminium business CoP likely to fall in Q3FY23

About the stock: Hindalco is the world’s largest aluminium company by revenues and a major player in copper.

* Over the years, Hindalco has transformed its business model to reduce dependence on 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

Key Highlights:

* Hindalco’s subsidiary Novelis reported a healthy performance in Q1FY23 wherein it reported quarterly adjusted EBITDA/tonne of US$583/tonne (up 33% QoQ). On the back of a healthy operational performance during Q1FY23, Novelis has upward revised its full year EBITDA/tonne guidance to US$525/tonne from US$500/tonne earlier

* During Q1FY23, coal sourcing for Hindalco’s India aluminium business was as follows - ~ 50% of the requirement was met through linkage coal, ~ 31% was met through e-auction coal and balance was met through imports and captive mines. For Q2FY23 also, the coal sourcing mix is likely to be similar to Q1FY23. However, from Q3FY23 linkage coal sourcing is likely to increase to ~60-65%. With higher proportion of linkage coal in overall coal sourcing mix, Hindalco’s India aluminium business cost of production (CoP) is likely to decline in Q3FY23, thereby auguring well for the company

What should investors do: Hindalco’s share price has given a return of 118% in the last two years (from ~| 192 in September 2020 to ~| 418 in September 2022).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Hindalco at | 500, based on SoTP valuation.

Key triggers for future price performance:

* For Novelis, we model EBITDA of US$525/tonne each for both FY23E, FY24E

* We model consolidated EBITDA margin of 12.9% for FY23E and 13.4% for FY24E

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

* Ratnamani Metals and Tubes (RMTL) is a niche player with superior capabilities in the industrial pipes and tubes segment

* BUY with a target price of | 2000

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