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Outlook strong on higher LME prices

Margin to remain strong despite rising cost

* HNDL’s 4QFY21 earnings for the India business was strong, as expected, with EBITDA up 23% QoQ to INR18.8b on higher LME prices. Consolidated net debt declined INR64b QoQ to INR474b and net debt/EBITDA ratio declined to 2.6x (v/s a peak of 4x post the Aleris acquisition).

* We broadly maintain our estimates and reiterate HNDL as our top nonferrous pick. Despite rising costs, we estimate India EBITDA/t in FY22E to be the highest ever in the last 10 years at USD865/t. We expect 35% EPS CAGR over FY21-23E, led by stronger LME prices and lower interest cost from deleveraging.

EBITDA rises 23% QoQ on higher LME prices and volumes

* India (standalone + Utkal) EBITDA rose 23% QoQ to INR18.8b (+9% v/s our est.). Adjusted PAT grew 19% QoQ to INR6.4b.

* EBITDA for the Aluminum segment rose 22% QoQ to INR16.1b (est. INR15b) due to higher LME prices (+9% QoQ), larger volumes (329kt, +4% QoQ), and greater VAP sales (92kt, +15% QoQ). Integrated cost of production rose 1% QoQ. The entire benefit of higher LME prices did not flow through as the company had hedged 58% of Aluminum prices at USD1,715/t (v/s an average LME price of USD2,093/t during 4QFY21). EBITDA/t was strong at USD660 (+17% QoQ, est. USD623/t).

* Copper EBITDA rose 33% QoQ to INR2.7b (above our estimate of INR2.2b) due to higher sales volumes (103kt, +47% QoQ) as the company postponed its smelter maintenance shutdown to 1QFY22. EBITDA/t declined by 9% QoQ to USD339/t due to lower Tc-Rc spreads.

* Consolidated net debt fell INR64b QoQ to INR474b, with net debt/EBITDA ratio declining to 2.6x (v/s 3.1x as of 31st Dec’20).

* Consolidated revenue/EBITDA/PAT stood at INR405b/INR56.0b/INR19.3b (+16%/+11%/-12% QoQ) in 4QFY21.

* Consolidated revenue/EBITDA/PAT increased 12%/22%/41% YoY in FY21 to INR1,318b/INR108b/INR55b.

* OCF/FCF stood at INR172b/117b (+36%/99% YoY) in FY21.

Cost of Aluminum production to rise

* The management expects demand for Aluminum and Copper to remain strong in CY21 on the back of a stimulus driven economic recovery. It expects aluminum prices to sustain at higher levels.

* Cost of Aluminum production is guided to increase by 4% QoQ in 1QFY22 due to rise in input commodity prices like CT Pitch, coke, etc.

* Hedge Position: 33%/5% of volumes at LME prices of USD1,915/USD2,500 per tonne in FY22/FY23.

* Novelis EBITDA guidance raised: The management has guided at an EBITDA of over USD500/t in 1QFY22. The same is likely to improve further in coming quarters owing to a higher share of Auto in the mix. Sustainable EBITDA guidance earlier stood in the USD475-500/t range

Strong growth with reasonable valuation; maintain Buy

* HNDL is our preferred non-ferrous pick owing to: a) robust volume recovery in both India and Novelis, b) strong profitability in its primary Aluminum business, given its low-cost integrated operations in India (in the top quartile globally) and higher LME prices, c) solid FCF generation, which should reduce leverage sharply, and d) reasonable valuation.

* The outlook for Novelis is positive due to resilience in the Beverage Can business and recovery in Auto demand (a high margin business). With better cost control and accruing synergies from Aleris, we expect Novelis’ business margin to remain strong over USD500/t.

* With ~65% EBITDA contribution now accruing from the non-LME business (Novelis), we see relatively higher stability in HNDL’s earnings.

* Given the tight demand-supply, we expect aluminum prices to remain strong, though prevailing higher inventory could limit a further upside. We factor in LME prices of USD2,300/USD2100 per tonne in FY22E/FY23E. A USD100/t change in aluminum prices impacts HNDL’s FY23E EPS by 6% and our TP by 5%.

* The stock trades at 5.6x EV/EBITDA and 9.1x P/E on FY22E. We value HNDL at INR475/share on a SoTP basis. Reiterate Buy.

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