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Coal costs to impact 1QFY23, result in line

* HNDL reported a strong, but inline set of 4QFY23 earnings. Consolidated revenue grew 38% YoY and 11% QoQ to INR558b (in line) in 4QFY22.

* Consolidated EBITDA rose 29% YoY, but fell marginally QoQ to INR73b,. 

* PAT grew 9% YoY and 18% QoQ to INR48b in 4QFY22. PAT was 12% lower than our estimate due to lower other income and higher incidence of tax provisioning.

* Revenue/EBITDA/PAT grew 48%/63%/174% YoY in FY22 to INR1951b/ INR283b/INR142b.

Guidance for 1QFY23 significantly lower due to prohibitive coal costs

* The management expects the cost of production of aluminum to rise by ~ 15% on a QoQ basis, largely driven by higher coal costs (due to nonavailability as well as high price). In the last five months, e-auction for COAL has been conducted at a premium of over 100%, while coal availability for the non-regulatory sector has been slashed, with a lion’s share of coal diverted to power plants.

* Commercial production from the recently won coal mines in the auction – Chakala and Meenakshi – will take 24-36 months to start as land acquisition process is still incomplete. Hence, any near term reprieve from higher captive coal production has been ruled out.

* The only possibility of higher coal availability to the non-regulatory sector (NRS) is in the case of a reduction in demand from the Power sector, with the onset of the monsoons. Dispatches are sluggish during the monsoon. Hence, any respite from coal costs is likely from 3QFY23 only.

Valuation and view

* The management’s guidance on Novelis is positive. Its long-term outlook is also encouraging.

* It said the entire growth capex will be funded internally. Work on the 180kt smelter expansion in India will not begin for the next two years till the pump hydro-electricity is tried and tested for stability of power.

* The USD2.5b greenfield capex in Novelis will drive mid-teen RoCE, implying a massive upgrade to the EBITDA trajectory of Novelis in the medium term.

* While Novelis continues to remain the bright spot in HNDL’s consolidated profitability, the concerns on its India business are transitory.

* We cut our FY23 EBITDA/PAT estimate by 16%/22%, at the consolidated level, driven by a 28% reduction in India EBITDA due to higher coal costs. We expect the coal crisis to dissipate in the next one-to-two quarters.

* We maintain our Buy rating with a SoTP-based TP of INR555 per share. An extended coal crisis remains the key risk.

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