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Adverse macros impinge the upside

Hindalco Industries’ (HNDL) Q4FY23 EBITDA at Rs53.3bn (down 27% YoY; up 50% QoQ) was 7% ahead of consensus estimates. Key takeaways: 1) Adverse macros and higher input prices impacted performance; 2) best-ever (Cu) EBITDA due to record continuous cast (CC) rod sales and favourable TC/RC charges; 3) downstream aluminium (Al) EBITDA/te declined further owing to weakness in consumer segment; 4) net debt/EBITDA was down to 1.39x with India business, nearly debt free at 0.03x; and 5) Board has recommended a dividend of Rs3/share.

Going ahead, we believe the benefits of lower coal cost in domestic operations are likely to be offset by: 1) continued destocking of beverage cans; 2) LME Al price being constrained by possible surplus in CY23; and 3) high capex intensity at both India and Novelis. That said, we believe pacing capex in line with cash generation might not put additional stress on balance sheet. In view of adverse macros, we lower our EV/EBITDA multiple to 5.2x (earlier 5.7x). As a result, our revised TP works out to Rs425 (earlier Rs450). Maintain HOLD rating on the stock.

Surpasses estimates on better-than-expected performance of India business. HNDL’s consolidated EBITDA at Rs53.3bn (down 27% YoY) was marred by lower LME Al price, cost headwinds and destocking in beverage cans at Novelis. Key takeaways: 1) CoP/t for Al (upstream business) was down 6% QoQ mainly due to 16% QoQ lower coal cost, resulting in Al EBITDA/te at US$825 (up 43% QoQ); 2) CC rod sales at 95kt (up 28% YoY) resulted in Cu EBITDA rising 55% YoY at Rs5.98bn and VAP Al sales rising 6% YoY at 91kt; 3) downstream Al business was, however, impacted by slowdown in consumer goods segment, resulting in adverse product mix and EBITDA/te declining 24% YoY (28% QoQ) at US$151/te; and 4) net debt/EBITDA (ttm) declining to 1.3x (lowest since Q4FY22). Going ahead, management believes strong balance sheet (and net debt free India business) would drive growth aspirations. Besides, commissioning of 34ktpa Al extrusions plant at Silvassa and an additional 350ktpa expansion (through bottlenecking) at Utkal Alumina refinery will drive performance.

Macro headwinds on demand and LME Al are likely to keep stock performance constrained. Global Al market has slipped into a surplus of 1.1mtpa in Q1CY23. Going ahead, we expect further supply from China. As per Shanghai Metals Market (SMM) estimates, another 2.63mnte of aluminium capacity is likely to be resumed and another 1.57mnte of new capacity would be commissioned in H2CY23. We expect this to result in higher Al exports, thus, putting pressure on LME Al prices. Besides, during Q4FY23 earnings concall, Novelis’ management indicated that destocking in beverage can market is likely to continue in Q1FY24 as well. Additionally, in Q1FY24, management expects CoP/te at upstream Al operations to stay flat and planned maintenance at Cu division to restrict its EBITDA to Rs3.5-4bn.

Outlook: Risk-reward fairly balanced. Despite long-term benefits from capacity expansion at Novelis and value-added capacity enhancement at India operations, we expect near-term challenges to prevail on stock performance. Additionally, LME Al price is expected to remain in choppy waters given the looming surplus in CY24. We maintain our HOLD rating on Hindalco with a revised TP of Rs425/share on 5.2x FY25E EBITDA. Margin improvement and uptick in shipments at Novelis are key to stock performance, in our view.

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