Hindalco Industries - Deleveraging remains priority - ICICI Securities

Hindalco Industries' Q2FY21 standalone performance was lower than expectations due to 10% lower EBITDA from integrated aluminium business. The key differential being lower-than-expected production (down 7% YoY) and sales volume (down 8% YoY). It will take Hindalco another couple of quarters to claim back historical production and sales run-rate of ~320kte per quarter. The same reflects in lowered FY21E earnings for us. Deleveraging remains the stated management priority, with next two years' FCF out of Novelis being utilised for bringing down Novelis debt, given the unfortunate timing and valuation outcome of Lewisport asset sale behind. Also, higher commodity prices have increased copper inventory valuation, thereby, impeding deleveraging in Q2FY21. Management did guide for a targeted gross debt reduction in Indian business as well. We maintain ADD.

- Higher power costs and lower production/sales runrate impact Q2FY21 EBITDA. Integrated spreads moved up by US$100/te QoQ, against derived realisation increase of US$198/te. Higher value-added mix helped chart a recovery in premium, but for higher power costs. Exports continue to be higher at 60% of the mix (expected to moderate to 50-54% in Q3FY21) - a trigger which can help improve premiums and margins. Management expects Q3 costs to be similar to Q2FY21 with Q4FY21 costs expected to witness 2% escalation. Management was categorical on deleveraging, marking a trajectory of Rs120bn net debt from Rs180bn currently (ex-working capital). Utkal Alumina expansion (500ktpa) is underway and should commission by Q4FY21E. Utkal Alumina refinery recorded highest ever production of 441kte in Q2FY21.

- Copper profitability improved substantially after a weak Q1FY21. Copper metal sales were down 9% YoY, while copper rod sales are flat YoY now. Highest ever fertiliser sales, up 25%QoQ and more than doubled, YoY in Q2 FY21, on the back of robust demand due to good monsoons. There are scheduled shutdowns in copper smelters in Q3 and Q4FY21 which will continue to impact volumes. Copper TCs continue to remain weak as mine supply recovery globally is running well below expectations and demand recovery, allowing shortage of concentrate. We believe, looking at the past performance of Dahej, management intervention is required to improve the operational efficiency of the smelter- perhaps through targeted capex.

- Maintain ADD. Increased contribution from Novelis and Aleris, not only reduces EBITDA volatility, but has also started to improve business RoEs. We work with LME estimates to US$1900/te; improved RoE profile of >9% allows us to value Hindalco at >0.7x P/B (FY22E). Understandably, majority of incremental capital allocation is chasing Novelis and allied businesses. A period of moderate capex and deleveraging can help unlock value.

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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