Buy Hindalco Ltd For Target Rs.1,180 by Motilal Oswal Financial Services Ltd
Beat on earnings; outlook remains positive Consolidated performance
* 2QFY27 consolidated net sales stood at INR917b (+39% YoY and +8% QoQ), above our estimate of INR818b. The growth was supported by favorable aluminum macros, higher premiums, and value-added products.
* Consolidated EBITDA stood at INR128b (against our estimate of INR113b), up 43% YoY but down 8% QoQ due to higher coal and CP Coke costs, which were partially offset by a rise in sulfuric-acid prices.
* APAT came in at INR73b against our estimate of INR65b (+50% YoY and - 16% QoQ) in 2QFY27.
Aluminum business
* Upstream revenue stood at INR134b in 2QFY27 (+33% YoY) and EBITDA stood at INR70b (+55% YoY; USD2,125/t) supported by favorable aluminum macros, higher premiums, and value-added upstream products.
* Downstream revenue stood at INR55b (+45% YoY), whereas downstream EBITDA stood at INR3.3b (+26% YoY), supported by favorable product mix, premiumization and higher shipments. EBITDA/t stood at USD289 (+9% YoY), led by a change in product mix and premiumization benefits.
* Upstream aluminum sales stood at 345kt (+1% YoY), while downstream aluminum sales stood 119KT (+6% YoY) in 2QFY27.
* Higher premiums from exports to high-premium markets and improved pricing for value-added products supported 2Q aluminum EBITDA/t despite lower LME prices and higher production costs.
* Aluminum production costs increased ~5% QoQ in 2Q, due to higher coal and CP Coke costs. Heavy rainfall and strong power demand in the north disrupt the coal linkage availability at Renusagar, Renukoot and Mahan, resulting in higher spot-auction procurement.
Copper business
* Copper Business revenue stood at INR214b (+47% YoY), on account of high metal prices and better byproduct realizations.
* Copper EBITDA came in at INR16.7b in 2QFY27, up 164% YoY, supported by strong operational performance, higher sulphuric acid realizations, and other one-off benefits (incl. precious-metal sales, derivative movements, and copper slag sales) of INR3.5-4b in 2Q.
* Copper metal sales stood at 116KT, up 2%, and CCR sales were at 96KT (flat YoY) in 2QFY27
Valuation and view
* HNDL posted strong earnings in 2QFY27, primarily driven by favorable premiums, better domestic product mix, and higher by-product pricing along with Novelis earnings.
* Going forward, we believe the earnings outlook for the India operations to stay strong and Novelis started recovering from Oswego-led volume disruption, resulting in additional cost to service customer.
* We expect 2H earnings to remain muted for both India operation and Novelis on account of higher cost of production and aluminum price reversal to USD3,100/t from the peak USD3,850/t. However, the strong volume outlook in 2H will support earnings against price moderation.
* We increase our FY27 revenue/EBITDA/PAT estimates by +5%, factoring in the strong 2Q earnings beat, led by high premiums and by-product realization.
* At CMP, the stock trades at 5.7x EV/EBITDA and 1.4x P/B on FY28E. We reiterate our BUY rating on HNDL with an SoTP-based TP of INR1,180.
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