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Strong performance in Q1; Outlook positive

Hindalco Industries, an Aditya Birla Group company, is an industry leader in aluminium and copper. The acquisition of Novelis in 2007 placed the company among the world’s leading manufacturers of aluminium.

* Company’s revenue surged 63.6% YoY to Rs. 41,358cr in Q1FY22, due to robust growth across all business segments.

* EBITDA grew 219.3% YoY to Rs. 6,173cr due to strong volume growth, improved product mix and favorable macro factors. Adjusted PAT rose to Rs. 2,211cr (vs. Rs. 290cr loss in Q1FY21) after adjusting for Brazilian tax litigation and reversal of employee severance cost.

* The new expansion plans in Brazil and Asian countries, along with higher demand across sectors and improved operating efficiency should boost performance. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 512 using SOTP.

Revenue grows with improvements in macro factors

In Q1FY22, Hindalco’s revenue rose 63.6% YoY to Rs. 41,358cr (+2.1% QoQ), driven by strong growth in Novelis, Aluminium, and Copper sales. Novelis business grew 54.4% YoY to Rs. 28,428cr due to strong shipment growth (+25.7% YoY), favorable product mix, and higher aluminium prices. Copper business rose to Rs. 7,094cr (+134.0% YoY) majorly driven by robust volume growth of copper metal & cc rods and higher global prices of copper.

On sequential basis, copper revenue reduced 16.6% due to decline in cathode production (-35.1% QoQ) and cc rod (-42.1% QoQ) because of maintenance shutdown in Smelter-3 and slowness in domestic market. Aluminium revenue increased 41.3% YoY to Rs. 6,267cr on account of higher global aluminium prices and aluminum VAP sales volume. Overall, aluminium production grew 9.6% YoY to 319Kt and alumina production rose 15.2% YoY to 718Kt.

PAT aided by exceptional gains

EBITDA rose to Rs. 6,173cr (vs. Rs. 1,933cr in Q1FY21) driven by strong volume growth, favorable commodity prices, better efficiencies, improved product mix, strong industry growth, and gain from Brazilian tax litigation. As a result, EBITDA margin expanded 730bps YoY to 14.9%. Reported PAT increased to Rs. 2,787cr vs. Rs. 709cr loss in Q1FY21). After adjusting for exceptional items (includes Rs. 558cr from Brazilian tax litigation and Rs. 18cr from reversal of employee severance cost), PAT increased to Rs. 2,211cr as against loss of Rs. 290cr in Q1FY21.

Key highlights

* At the end of quarter, consolidated net debt to EBITDA ratio reduced to 2.36x vs. 3.83x as on June 30, 2020.

* Hindalco targets to attain capacity of 100MW for renewable energy by Mar-2022, out of which 49MW has been implemented and remaining is under progress.

* Utkal Alumina refinery’s produced 425Kt in Q1FY22 post maintenance shutdown in Q4FY21.

Valuation

Hindalco is expanding its business in Brazil and Asian countries i.e. China, in next few years along with 32MW solar projects in FY2023. With increase in COVID vaccination drive, the demand from trade market, construction business, consumer durables, and industrial machinery is expected to increase along with higher demand in food and pharma packaging. This bodes well with company’s medium to long-term performance. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 512 using SOTP valuation.

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