Buy Hindalco Ltd For Target Rs.730 by Motilal Oswal Financial Services Ltd
In-line performance; muted Novelis performance offset by strong India operation
Consolidated performance
* 3QFY25 consolidated net sales stood at INR584b (+11 YoY/flat QoQ), in line with our est. of INR595b, aided by better realization.
* Consolidated EBITDA stood at INR76b (+29% YoY/-4% QoQ), in line with our est. of INR77b, driven by lower costs and operating efficiencies.
* APAT stood at INR38b (+61% YoY/-12% QoQ), in line with our estimate.
* For 9MFY25, revenue stood at INR1736b (+9% YoY), EBITDA came in at INR230b (+34% YoY), and APAT was INR113b (+63% YoY).
* Net debt-to-EBITDA ratio rose to 1.33x in 3QFY25 from 1.19x in 2QFY25.
Aluminum business
* Upstream revenue stood at INR99.9b in 3QFY25 (+25% YoY), led by higher average aluminum prices.
* Aluminum upstream EBITDA stood at INR42.2b (+73% YoY; USD1,480/t), driven by lower input costs.
* EBITDA margins stood at 42% (vs. 31% in 3QFY24).
* Downstream revenue stood at INR32b (+25% YoY) on account of higher volume. Downstream aluminum sales stood at 99KT in 3QFY25 (+10% YoY) on account of market recovery.
* Downstream EBITDA stood at INR1.5b (+36% YoY) on account of a favorable product mix. EBITDA/t stood at USD179 (flat QoQ) in 3QFY25 as compared to USD146 in 3QFY24
Copper business
* Copper business revenue stood at INR137b (+15% YoY) on account of higher average copper prices.
* EBITDA for the copper business was at INR7.8b, up +18% YoY.
* Copper metal sales were at 120KT (+1% YoY) in 3QFY25 and CCR sales were at 95KT (+1% YoY).
Novelis’ 3QFY25 performance
* Shipment volume stood at 904kt (-1% YoY/-4% QoQ) vs. our estimate of 910kt. The weakness in volume was primarily due to lower VAP and automotive shipments.
* Revenue stood at USD4.1b (+4% YoY/-5% QoQ), largely in line with our estimate of USD4.2b. Revenue was supported by higher aluminum prices.
* Adjusted EBITDA stood at USD367m (-19% YoY/-21% QoQ), below our estimate of USD428mn. This was primarily driven by higher aluminum scrap prices and an unfavorable product mix. EBITDA/t came in at USD406/t (vs. our est. of USD470/t) in 3QFY25.
* APAT stood at USD125m (-36% YoY/-38% QoQ) vs. our est. of USD154m.
* The current net debt-to-adj. EBITDA ratio stands at 2.9x vs. 2.5x in 2QFY25.
Highlights from the management commentary
* As of now, Novelis operations are unlikely to be significantly impacted by the ongoing tariff war.
* HNDL’s coal cost remained stable, with 50% sourced through linkage and 50% from e-auctions. Management has guided that the new captive coal mines (Chakla + Meenakshi coal mine) will reduce the company’s coal costs by 30% from current coal costs.
* HNDL hedged ~35% of its aluminum at USD2,600/t for 4QFY25 and secured 12% hedging at USD2,700/t for FY26.
* Out of the 300MW of renewables capacity, HNDL commissioned 6.3MW of floating solar capacity at Mahan, bringing the total RE power to 189MW.
* Chakla captive coal mine is on track to start operations by the end of FY26.
* TC/RC prices were under pressure, with the current TC/RC benchmark settling at USD0.054/pound (-73% YoY from USD0.205 in CY24), which has increased smelting costs and impacted margins. The restarting of Indonesia’s copper concentrate exports will provide significant relief.
Valuation and view
* HNDL’s 3QFY25 consolidated performance came as anticipated. The earnings growth was driven by favorable pricing and lower input costs. Novelis posted a weak performance, which was offset by strong domestic operations. Scrap price inflation raised the CoP for Novelis, impacting margins in 3Q.
* Management expects scrap prices to normalize in the coming quarters, and with strong domestic operations, we expect a healthy consolidated performance for FY26/27E. Considering this, we largely maintain our earnings estimates.
* The ongoing capex in Novelis will establish HNDL as the global leader in the beverage cans and automotive FRP segments. The capex is likely to be completed within the stated timeline, and management does not see any further capex increase.
* At CMP, the stock trades at 5x EV/EBITDA and 1.1x P/B on FY27E. We reiterate our BUY rating on HNDL with a revised SoTP-based TP of INR730.
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