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Results in line; coal costs to moderate marginally

* Hindalco reported yet another in-line but weak set of results, largely attributed to lower LME aluminum price (-11% YoY/-18% QoQ); costs also continued to rise resulting in a 36% QoQ decline in consolidated EBITDA in 2QFY23. 

* Consolidated net sales stood at INR562b (+18% YoY/-3% QoQ), 12% beat to our est. of INR501b. Higher YoY sales were driven by strong performance from Asia operations of Novelis and higher copper ASP

* Consolidated EBITDA at INR54b was down 29% YoY/36% QoQ but was in line with our estimate of INR55b. India EBITDA was a significant beat as the cost escalation, especially on thermal coal, was markedly lower than estimate and the company was also carrying low-value inventory

* India aluminum sales volume was 341kt (flattish YoY). Copper sales volume at 112kt was +2% YoY /+11% QoQ as the third smelter ramped up.

* Adjusted PAT stood at INR22b (-36% YoY/ -46% QoQ) on declining EBITDA, but was in line with our estimate of INR23b for the quarter

* Hindalco’s 1HFY23 Sales/EBITDA/PAT stood at INR1,142b/INR138b/INR63b, respectively. Sales rose 28% YoY; EBITDA was flat and PAT fell 5% YoY.

Highlights from the management commentary

* Disciplined capital allocation is likely to continue. New capex will be subject to incremental internal accruals only. No debt will be taken for new projects.

* The near-term cost of production will start reducing on better coal availability.

* Captive coal mines will start contributing effectively from FY24E onwards that should lead to a structural reset to the costs at lower levels.

Valuation and view

* Management stated that Novelis’ EBITDA is likely to be around USD525/t in about two quarters from now when most of the contracts are renewed; however, it will face headwinds in the near term on lower metal spreads.

* In the near term, we note that the LME at current levels factors in the pessimism in the macro environment including: a) slowdown in China, b) recession in Europe, and c) elevated level of inflation in the US, which could drag growth going forward

* We have raised our FY23E/24E EBITDA by 8%/15% driven primarily by the 54%/58% hike in India business, respectively. As a result, our consolidated PAT has increased 13%/23% for FY23E/24E, respectively.

* We have slightly increased our LME aluminum price assumption for FY23 to USD2,472/t (from USD2,451/t)

* We maintain our BUY rating with an SoTP-based revised TP of INR520 (v/s INR480 earlier). China remains the key risk to the sector

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