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Higher LME prices to drive earnings growth

Margin to remain strong despite rising cost

* HNDL’s 1QFY22 result for the India business was strong, as expected, with EBITDA up 29% QoQ to INR24.3b on higher LME prices. Consolidated net debt increased by INR45b QoQ to INR519b, and net debt/EBITDA declined to 2.36x (v/s a peak of 4x after the Aleris acquisition).

* We maintain our estimates and reiterate HNDL as our top non-ferrous pick. Despite rising costs, we estimate India EBITDA/t in FY22E to be the highest ever in the last 10 years at USD959/t. We expect 43% EPS CAGR over FY21-23E, led by stronger LME price and lower interest cost from deleveraging.

Higher LME prices boost EBITDA by 29% QoQ

* India (standalone+Utkal) EBITDA was up 29% QoQ to INR24.3b (+7% v/s our est.). Adjusted PAT rose 62% QoQ to INR10.4b (-5% v/s our est.).

* EBITDA for the Aluminum segment rose 29% QoQ to INR23.5b (est. INR20.9b), despite an 8% QoQ decline in volumes (303kt, -4% v/s our est.), due to higher LME prices (USD2,393/t, +14% QoQ). Aluminum derived CoP rose 2% QoQ. However, the entire benefit of higher LME prices did not flow through as the company had hedged 33% of aluminum prices at USD1,915/t (v/s an average LME price of USD2,393/t during 1QFY22). EBITDA/t was strong at USD1,052 (+41% QoQ) (est. USD898/t).

* Copper EBITDA declined by 19% QoQ to INR2.6b due to lower sales volumes (80kt, -25% QoQ) as the company took a maintenance shutdown in 1QFY22. EBITDA/t improved by 9% QoQ to USD442/t on higher byproduct realization.

* Consolidated revenue/EBITDA/PAT stood at INR414b/INR67b/INR32.5b in 1QFY22, up 2%/12%/67% QoQ.

Aluminum CoP to rise on input commodity inflation

* In line with its earlier outlined plans to expand downstream capacity, the company announced a 170ktpa expansion in flat rolled products (FRP) at a capex of INR30b. The project would be completed in 36 months.

* Aluminum CoP is guided to increase by 5% QoQ in 2QFY22 due to rise in input commodity prices like coal (+8% QoQ) and CT coke (+25% QoQ).

* It has hedged 32%/23% of LME prices at USD1,914/USD2,229 per tonne in FY22/FY23.

* Higher working capital needs due to higher copper LME prices led to an increase in debt. However, the same is funded through low-cost buyers’ credit, and wouldn’t impact finance cost materially.

* The 500ktpa Utkal refinery expansion would be commissioned in 2QFY22. HNDL expects to sell its excess production in the domestic market.

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 valuations.

* The outlook for Novelis is positive due to its resilience on the Beverage Can business and demand recovery in Auto (a high margin business). With better cost control, higher scrap spreads, and accruing synergies from Aleris, we expect Novelis’ business margin to remain strong at over USD520/t.

* With ~65% EBITDA contribution now accruing from the non-LME business (Novelis), we see relatively higher stability in HNDL’s earnings. We expect HNDL’s EBITDA to grow at 21% CAGR over FY21-23E to INR255.3b.

* Given the tight demand-supply, we expect aluminum prices to remain strong. We assume an LME price of USD2,375/USD2,300 per tonne in FY22E/FY23E. A USD100/t change in aluminum prices impacts HNDL’s FY23E EPS by 5% and our TP by 4%.

* The stock trades at 5.2x EV/EBITDA and 8.8x P/E on FY22E. We value HNDL at INR520/share on a SoTP basis. We reiterate our Buy rating.

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