Buy Hindalco Industries Ltd For Target Rs.680 - Motilal Oswal
Novelis reports subdued but in-line results
Energy crisis and supply chain bottlenecks impact EBITDA adversely
* Novelis reported in-line quarter. Net sales/EBITDA/RPAT for the quarter, at USD4.8b/USD431m/USD215m, stood +12%/-15%/-18% QoQ, respectively. High energy costs in Europe and semiconductor chip shortages in the automotive business impaired profitability during the quarter.
* Shipments for the quarter stood in line at 987kt (up 1% QoQ). EBITDA/t stood at USD437 (down 20% QoQ), in line with our estimate of USD446.
* In FY22, Revenue/EBITDA/RPAT stood at USD17b/ USD2b/USD955m (up 40%/18%/303% YoY), respectively.
Guidance for FY23 is strong, returning to USD500/t+ EBITDA
Management guided for EBITDA north of USD500/t driven by several factors including: a) improved semiconductor availability, and b) rolling over of new contracts that have a higher margin. The guidance has an upside risk if the Russia-Ukraine conflict subsides.
With leverage at 2.2x on net debt-to-EBITDA basis, the priority has shifted to growth from debt reduction. Capex guidance for FY23E stands at USD1.3- 1.6b, which includes USD300m of maintenance capex.
Work will start on a Greenfield aluminum hot mill project in the US after a gap of 40 years, which is 600kt at a total outlay of USD2.5b and can be expanded to 900kt later on
View and valuation
* We maintain our estimates for Novelis. However, we cut our LME aluminum estimate for FY23 to USD2,900/t (implying aluminum at USD2,850/t+ for the remaining of FY23) from USD3,300/t. The reduction in aluminum price is due to non-imposition of ban on aluminum from Russia, which was envisaged earlier.
* Since, Russian aluminum is not banned against previous expectations, the LME aluminum prices corrected through the entire rally – from USD2,700/t to USD4,000/t and now back to ~USD2,700/t.
* Accordingly, we reduce our SoTP-based TP of Hindalco to INR680 from INR745. The stock is trading at 3.9x/4.4x our FY23E/24E EV/EBITDA. The stock trades at 1.3x our FY23 P/B estimates, while offering an attractive RoE of 25%. LME aluminum has corrected 32% from its recent high of USD3,984/t. Hindalco has also corrected 33% over the same period. We believe high input cost inflation, especially thermal coal, will prevent further decline in LME. Maintain BUY.
To Read Complete Report & Disclaimer Click Here
For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412
Above views are of the author and not of the website kindly read disclaimer