Buy Hindalco Industries Ltd For Target Rs. 800 By JM Financial Services
Beat in margins; captive mines to enhance raw material security
Hindalco reported 4Q consol. adj. EBITDA of INR96bn, above JMfe of INR84bn driven by India business outperformance. India aluminium business (incl. Utkal) delivered an EBITDA of INR50bn, up 16% QoQ primarily driven by higher realisation (+7% QoQ). Net debt decreased sequentially to INR353bn (vs. INR418bn in 3Q). Key takeaways from the call are a) aluminium CoP expected to be flattish to 1% up in 1Q as CP coke prices have gone up b) downstream expansion through Aditya FRP remains on track – to be commissioned in FY26; taking the capacity to 600ktpa c) Aluminium downstream FY26 EBITDA/t guidance at USD250-300/t (up from USD240/t in 4QFY25) – to go up to USD300/t+ in medium-term d) Company plans to reach 300MW of renewable energy in 1QFY26 – 189MW is currently operational d) hedging for 1QFY26; 15% of commodity at USD2,695/t and 13% currency hedged at INR86 per dollar e) capex guidance for India operations at INR75bn-INR80bn for FY26 vs INR65bn incurred in FY25. The long term outlook for Hindalco continues to remain buoyant given a) resilient performance by India aluminium operations b) record high run rates in the copper business c) enhanced coal security post acquisition of Meenakshi, Meenakshi west, Bandha, Chakla coal mines and d) growth capex to augment capacity in downstream business. Hindalco, given ~70%+ steady/strong EBITDA being non-LME linked, remains our preferred play in the metal space. Re-iterate Buy.
* Revenue gains on stronger LME: Novelis reported revenue at USD4.6bn (+13%YoY) primarily driven by higher realisations (+12% YoY). The total rolled product shipments stood flat YoY at 957ktons in 4Q primarily driven by strong demand in beverage packaging sector offset by weak demand in automotive sector. Adj. EBITDA/t stood at USD494/t, up by USD88/t YoY driven by higher realisations (+6% YoY). Tariff uncertainty led to muted demand in the automotive sector – leading to lower automotive shipments.
* India Al business spreads improve given higher realisations: Aluminium EBITDA (incl Utkal) stood at INR50bn (up 16% QoQ) primarily driven by higher realisation (+ 7% QoQ). Copper EBITDA came in at INR6.1bn for the quarter, down 21% QoQ due to lower realisation (-6% QoQ) partially offset by lower costs (-4% QoQ). Net debt decreased by INR65bn to INR353bn during the quarter. Capex guidance for India operations stands at INR75bn-INR80bn for FY26; INR65bn incurred in FY25. Aluminium CoP came lower by 1% in 4Q and expected to be flat to 1% up in 1Q as CP coke prices have gone up.
* Growth capex on track; Chakla and Bandha mines expected in FY28: Hindalco remains committed to growth through downstream expansion of Aditya FRP project (set to commission in FY26) taking their downstream capacity to 600kt. The company expects ~60-70kt commercial sales from Aditya FRP in FY26. Chakla remains on track – box cut expected to start in CY26 – coal to come in from Dec’26. The company acquired 100% stake in EMMRL - a lease holder of Bandha coal block. Through this, company plans to improve raw material security for its Mahan smelter.
Key concall takeaways:
* Hedging for 1QFY26:
- 15% of Aluminium hedged at USD2,695/t
- 13% of currency hedged at INR86
* Capex guidance for India operations for FY26 at INR75-80bn; FY27 to be a peak year in terms of capex with multiple projects kicking in.
* Aluminium downstream EBITDA/t guidance at USD250-300/t (up from USD240/t in 4QFY25) – to go up to USD300/t+ in medium-term.
* Company witnessed higher Al upstream EBITDA/t in 4Q given:
- CoP was lower by 1% QoQ in 4Q compared to 3Q
- Higher alumina sales – benefits of higher alumina prices in 3Q came with a lag in 4Q.
- Better product mix with a higher share of specialty.
* Coal:
- Company announced the acquisition of Bandha coal block with resources to the tune of ~197mn tons and mine-life of 45 years. Its proximity to the Mahan smelter allows raw material security for the company. Cost of acquisition of equity shares stands at INR4.8mn with Net debt at INR11.31bn. Bandha is also expected to be fully ramped up by FY28.
- Chakla remains on track with coal production expected to start by December of next year – to take 1 year to ramp-up; full volumes expected in FY28.
- Coal sourcing: 50% through linkage, 47% through e-auction and remaining through own sources.
* With Tc/Rc benchmark at 5.45 (cents/pounds) for 2025, company expects Copper EBITDA run-rate to be at INR6bn per quarter going ahead.
* Aditya FRP is expected to be commissioned in FY26 - to start contributing volumes by Jun’25; FY26 volume guidance at 60-70kt from this project.
* Company expects alumina sales to be 190kt in 1Q.
* The 36kt Silvassa extrusion plant is expected to fully commission this year with Copper IGT to be commissioned in 1QFY26.
* This year, company expects additional production of a) 60-70kt from FRP b) 15kt of extrusion from Silvassa and c) 20kt from copper IGT.
* Company plans to reach 300MW of renewable capacity by 1QFY26
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SEBI Registration Number is INM000010361
