Hindalco Industries - Surprising performance on spreads; disappointing on divestment proceeds - ICICI Securities

Novelis' Q2FY21 earnings surprised on spreads and volumes. Adjusted EBITDA/te was US$493/te, against expected EBITDA of US$390/te. Rolled product volumes were 923kte (up 11% YoY), with most YoY volume increase (88kte) being on account of Aleris that too in North America. However, the superlative spread performance has been overshadowed by a disappointing outcome on the sale of Lewisport assets. Management clarified that the EV for Lewisport asset sale agreement to American Industrial partners is ~US$300-350mn with ~US$171mn net cash proceeds. Combined with €310mn sell of Duffel to Alvance, Novelis could gather combined EV of ~US$650mn for combined sell of Duffel and Lewisport. This is much lower than US$960mn worth of assets segregated as 'held for sale' in Q1FY21 and is a key disappointment from Q2FY21 result.

- The bulge in spread has been driven by North America. Aleris volumes and EBITDA/te in Q2FY21 have been 88kte and US$47mn. However, it's the spread of North America which mostly drove the spread expansion to US$550/te and into the territory of a surprise. The spread in North America continues to face tailwinds on account of i) strength in specialty portfolio for Aleris, ii) tight can sheet market, yet meaningful capacities coming online, iii) improved scrap LME spread, and iv) some duty support on account of 10% import duty on Canada. All these are driving the spreads higher, and not much adjustment on account of these factors has been factored in while guiding for US$480-500/te blended EBITDA.

- EV for Lewisport sale disappoints. EV/net cash proceeds of ~US$300-350mn/US$171mn falls far short of expectations. Given the expected EBITDA runrate of US$100mn, which implies ~3x EV/EBITDA for Lewisport, much lower proceeds than what was indicated through 'assets held for sale' post Q1FY21. Also, this makes the acquisition of residual assets at ~ 9x EV/EBITDA (not including synergies in the EBITDA but assuming US$60mn of post-Covid recovery as highlighted by the management - Lower asset sales value has implications on net debt reduction target; elevated spreads have reduced net debt to EBITDA to 3.7x, and management stays committed to reach net debt to EBITDA target of 3x in the medium term. Asset sales value appears lower-than-consensus expectation by US$400-500mn on the lower end.

- Guidance remains strong; spreads leads to upgrade in earnings. Management has guided higher FCF on a YoY basis. Also, volume guidance for FY23E has been shared - at 4.5mnte. Also, post-sale of Duffel and arrangement of sale of Lewisport, synergy targets have been upped, from US$150mn to US$180mn. Earlier, US$75mn synergies were to be achieved in a 3-year period, the same target has been upped to US$120mn.

Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.209.55 as compared to the previous close of Rs. 210.55. The total number of shares traded during the day was 126090 in over 1624 trades.

The stock hit an intraday high of Rs. 212.4 and intraday low of 207.15. The net turnover during the day was Rs. 26546826.

Source : Equity Bulls

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