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Hindalco (including Utkal Alumina) reported better than expected adjusted EBITDA of Rs36.1bn (CentrumE: Rs30.3bn), down 11% QoQ. The beat was on account of benefits of lower cost aluminium inventory and higher profitability in copper segment. Though Management informed that aluminium CoP/t increased by 17% QoQ but derived aluminium CoP, at USD2,362/t, was up 3% QoQ only due to benefits of sale of low cost aluminium inventory. Hedging at higher prices (~30% volume at ~USD2,500/t v/s 27% of volume at USD1,840/t in Q4FY22) helped to restrict fall in blended aluminum prices, down ~USD200/t QoQ. As a result, aluminium EBITDA/t declined by 18% QoQ to USD1,294 in Q1FY23. Copper profits increased due to higher by-product prices. Q2FY23 earnings will be severely hit due to higher coal cost at Indian operation. Management’s focus is on growth wherein it is investing ~USD 8.0bn during FY23-27 which can generate RoCE of 15%+ and will be funded via internal accruals. Reiterate BUY with unchanged target price of Rs523, valuing Novelis at 6.5x FY24E EV/EBITDA and Indian operations at 4.0x FY24E EV/EBITDA.

Aluminium: Inventory benefits restricts fall in profitability, EBITDA/t at USD1,294

EBITDA of India aluminium (including Utkal Alumina) of Rs33.2bn, down 18% QoQ and EBITDA/t was USD1,294, down USD286/t QoQ. Benefits of low cost inventory and hedging at higher prices helped to offset ~17% QoQ increase in aluminium CoP/t. Though average LME aluminium price declined by USD398/t QoQ to USD2,882/t, HNDL’s blended aluminium realisation was down by USD199/t QoQ to USD3,696/t. During Q1FY23, HNDL hedged ~30% volume at ~USD2,500/t v/s 27% at USD1,840/t in Q4FY22. Management informed that CoP of primary aluminium was up ~17% (guided ~15% increase) QoQ in Q1FY23 and guides further 18-20% QoQ rise in CoP in Q2FY23 due to higher coal cost as it has been receiving lower quantity via linkage coal from Coal India (50-52% of requirement v/s 60-65% earlier) and has to imports and buy at high priced e-auction. Sales volume declined 3.9% QoQ to 323kt due to supply constraints (7-10kt hit on volume). Hindalco has hedged 30% of FY23 volume at ~USD2,500/t and 60kt of FY24 volume at USD3,000/t.

Copper: Improved operating performance

Copper sales volume fell 3.8% QoQ to 101kt with copper rods sale of 80kt (Q4: 74kt). Tc/Rc margins remained flat QOQ (USc15.8/lb v/s USc15.76/lb in 4FY22). EBITDA was up 46% QoQ to Rs5.65bn due to higher by-product prices and higher sale of value added products. Management guides quarterly EBITDA run rate of ~Rs4bn.

Valuation: Reiterate BUY with target price of Rs523

Q2FY23 Indian operations’ EBITDA/t should be sharply lower (USD600-650/t v/s USD1,294 in Q1FY23) due to higher CoP as high cost coal will hit P&L and lower aluminium prices. Novelis’s earnings too should fall from highs in Q2FY23. With increase in linkage coal from Q3FY23, its aluminium CoP should decline. Despite the fear of recession in developed world, Management has earlier revised Novelis’s sustainable EBITDA/t guidance to USD525+ (earlier USD500/t+) which is positive. With comfortable balance sheet, HNDL is in an expansion mode with 5-year growth capex of ~USD8bn (~70% of capex to downstream projects with very little volatility in earnings) to be funded via internal accurals. At CMP, the stock is trading at 4.9x FY24E EV/EBITDA. We reiterate BUY with target price of Rs523.

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