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Strong balance sheet; opting to growth

Hindalco (including Utkal Alumina) reported better than expected adjusted EBITDA of Rs35bn (CentrumE: Rs32.2bn), up 5.9% QoQ. The beat was on account of higher than expected aluminum prices, while CoP was along expected lines. Higher sale in the domestic market and higher LME aluminum prices led blended aluminum prices to increase by 8.4% QoQ offsetting CoP increase, thereby increasing EBITDA/t by 10% QoQ to USD1,385 in Q3FY22. Management informs that growth will now be the priority as it is comfortable with current net debt of ~Rs437bn (Net debt/EBITDA of 1.6x). We increase our FY22E/FY23E EBITDA by 5% each to factor in higher aluminium prices and higher copper volume. Reiterate BUY with revised target price of Rs641 (earlier Rs609), valuing Novelis at 7x average of FY23E & FY24E EV/EBITDA and Indian operations at 5.5x average of FY23E & FY24E EV/EBITDA.

Aluminium: Higher prices offset cost increase, EBITDA/t at USD1,385

EBITDA of India aluminium (including Utkal Alumina) of Rs33.76bn, up 6.8% QoQ and EBITDA/t was USD1,385, up USD124/t QoQ. The increase in profitability was due to 8.4% QoQ (USD263/t) growth in blended aluminium realization (USD3,383/t), which was higher than the increase in LME aluminium prices (up by USD115/t to USD2,762/t). Higher alumina sale (sold ~100kt) and higher aluminium sale in the domestic market (52% v/s 49% in Q2FY22) could have helped in better realization. The above performance was despite ~32% of volume being hedged at USD1,913/t. CoP of primary aluminium was up 7.5% QoQ though increase in coal cost was minimal. Management guides further 9.5% QoQ rise in CoP in Q4FY22 due to higher coal cost. Sales volume declined 3.8% QoQ to 325kt, as Q2FY22 included 10kt of aluminium which was stuck at ports in Q1FY22. Hindalco has hedged 5% of FY23 volume further at USD3,000/t (hedged 28% of FY23E volume at USD2,360).

Copper: Improved operating efficiencies drive profits

Copper sales volume remained flat QoQ at 110kt with copper rods sale of 71kt (Q2: 70kt). Tc/Rc margins remains flat QOQ at USc14.67/lb but CY22 TC/RC margin benchmark contract has been finalised at USc15.4/lb, thereby copper profits is expected to increase in ensuing quarters. With improved operating efficiencies, higher copper and by-product prices, EBITDA increased 11% QoQ to Rs3.9bn, though EBITDA/t increased 9.5% QoQ to USD473/t.

Valuation: Reiterate BUY with increased target price of Rs641

With comfortable balance sheet, growth rather than deleveraging becomes priority for HNDL and we can hear few announcements in next 6-9 months on alumina expansion, probable brownfield aluminium expansion (depending on energy source and is at evaluation stage) besides continuous downstream expansion in India. Even in Novelis, management can pursue further growth opportunities especially in beverage can segment. We are yet to factor in any future growth capex which will restrict any major deleveraging, when comes. We have factored average LME aluminum price of USD2,600/t in FY23E and FY24E.We reiterate BUY with target price of Rs641.

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