Buy Hindalco Ltd for the Target Rs.900 By Emkay Global Financial Services Ltd
Steady Q2; hedges reinforce leverage guardrails
HNDL reported Q2 business segment EBITDA of Rs91bn (-0.5% vs Emkay estimate; +6.6% QoQ), led by a strong operating performance in aluminium upstream, with sequential volume growth of 4.9%, price increase of 7.1%, and a global industry-leading EBITDA/t of USD1,521. The company has hedged 40% of H2 volumes at USD2,738/t, even as spot prices have run up to USD2,850/t in recent weeks. A more robust hedging book provides HNDL with a smoother earnings trajectory and reduced earnings variability. With a USD10bn capex cycle underway, the management’s focus on hedging is less about calling the metal cycle and more about securing predictable cash flows and maintaining leverage guardrails. The hedges, alongside Novelis’s fire incident impact, soften the near-term earnings momentum; however, the fundamental construct that HNDL offers remains in place, keeping us positive on the stock.
Steady Q2 print
HNDL reported Q2 business segment EBITDA of Rs91.0bn (-0.5% vs Emkay; +6.6% QoQ), led by a strong operating performance in aluminium upstream, with sequential volume growth of 4.9%, price increase of 7.1%, and a global industry-leading EBITDA/t of USD1,521. Novelis also met expectations, reporting adjusted EBITDA of USD422mn. Aluminium downstream and Copper segments performed well. Consolidated net debt increased by 17.2% to Rs414bn, primarily due to capex outlay of Rs113bn in H1FY26.
Key takeaways from the conference call
1) Novelis: Scrap spreads improved in recent months. The business could see spread improvement, tariff impact reversal, and cost takeout, resulting in an improvement in margins by Q4. 2) The key expansion projects (Chakla, Bandha, Aditya) are on track, with coal mine box cuts due by Dec–Jan. 3) Hedging: HNDL hedged 31% of Q3 and 49% of Q4 aluminium exposure at USD2,700 and 2,760/t, respectively, with 10% booked at USD2,800/t for FY27. 4) Copper: TC/RC for CY26 settled at USD5.45c/lb, which is materially lower than that of CY25; this could result in reduced copper earnings. 5) Balance sheet: Consolidated net debt-to-EBITDA is unlikely to cross 2x (currently at 1.2x) despite the USD10bn capex program. Parent to infuse USD750mn into Novelis which would help maintain debt covenants, protect bondholders’ interest, and the credit rating.
Setting up for a healthier earnings cycle; reiterate BUY
Near-term hiccups at Novelis and a slower earnings momentum do not derail our mediumterm thesis on HNDL. In addition, the expansion in scrap spreads and tariff absorption could lead to a meaningful recovery in Novelis’s margins up to USD500/t in FY27E, from USD450/t in FY26E. We raise our FY26-27 EBITDA estimates by 4-5%, as we lift our aluminium price and Novelis’s margin assumptions. We retain BUY and our TP of Rs900.
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