Hindalco shares gain post Novelis results, an analyst awaits better entry point

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Atlanta-based Novelis Inc, a wholly-owned subsidiary of the Aditya Birla group’s Hindalco Industries, reported a 28% year-on-year growth in operating profit or EBITDA at $514 million, driven by higher volumes, lower cost of production, and improved pricing. This resulted in EBITDA per tonne of $540, which was higher than the management’s EBITDA guidance of $525 per tonne.

Following Novelis’ March quarter earnings announcement, domestic brokerage firm Nuvama Institutional Equities has increased its FY25 and FY26 consolidated EBITDA estimates by 13% and 12%, respectively, to factor in higher aluminium prices.

Moreover, the brokerage has also upped its EV/EBITDA multiple to 6.5 times from 6 times earlier to factor in the sustainability of Novelis’ earnings and higher profitability in Indian operations.

According to Nuvama, the management is cautious in raising EBITDA per tonne guidance beyond $525 despite the implementation of cost-cutting measures done last year. Q4 numbers, as per the brokerage, restore confidence in the robustness of its business model.

Shares of Hindalco Industries Ltd. have rallied nearly 32% in the last six months. Nuvama has maintained a ‘Hold’ rating on the counter, saying it would await lower entry points to re-enter the stock.

The brokerage, however, increased its target price to ₹651 per share from ₹508 apiece earlier. The stock has run up sharply, Nuvama said while seeing limited upside going ahead.

Nuvama in a note said that Novelis’ net debt declined to $4.3 billion from $4.6 billion in the third quarter of FY24 on release of WC ($455 million), normally a year-end phenomenon. Still, it sees higher capex ($2 billion in each of FY25 and FY26), which it said should keep debt higher in FY25 to FY26.

“We expect debt to rise to $5.4 billion in FY26E (net debt/EBITDA of 2.4 times). Benefits of its $4.1 billion Bay Minette project (to be commissioned by FY27-end) are likely to start accruing FY28 onwards,” the brokerage stated.

Global brokerage Jefferies has maintained a ‘Buy’ recommendation on Hindalco but upped its price target to ₹810 from ₹700 per share earlier. The broking firm said the company’s earnings outlook is improving with demand for beverage cans inflecting upwards.

Novelis margins are at seven-quarters higher, and a rise in aluminium prices is expected to lift India margins, Jefferies said.

The foreign brokerage has raised its FY25-FY26 earnings per share estimates by 2-3%. Jefferies also said that Hindalco’s valuations at 6.1 times FY25 EV/EBITDA estimates are reasonable.

Another top brokerage CLSA has maintained a ‘buy’ on Hindalco, with a target price of ₹770 per share. The brokerage said that Novelis sees further levers for margin improvement, such as price revisions, a rise in recycling content and operating efficiencies.

In its note, CLSA said that capex has been guided at $1.8 billion-$2.1 billion, which could drive up leverage but remain below 3 times. The brokerage believes that debt reduction is in line with seasonality.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow