Hindalco Industries - Saturation of an earnings trigger - ICICI Securities

Novelis reported an inline adjusted EBITDA of US$505mn in Q4FY21 (EBITDA/te of US$514). Novelis was categorical in playing down the EBITDA impact from a halt in auto production due to chip shortage - can maintain US$500/te of EBITDA in Q1FY22E. Aleris continues to benefit from the constructive building and construction markets, reporting US$70/200mn of EBITDA for Q4FY21/FY21. For the last couple of years, Novelis was instrumental in providing a steady tailwind to Hindalco's EBITDA as i) scrap LME spreads expanded ii) Aleris acquisition coincided with specialties taking support of a strong building and construction markets as well as higher scrap LME spread and iii) Latin American spreads rebased to US$800/te+. With most of the volume and margin upsides, from Novelis, in the estimates, the story of Hindalco will pivot back to LME and its volatilities. We maintain HOLD with a revised target of Rs417 (Rs270 earlier)

- 4.5mtpa volumes factored in for FY23E. Novelis continues to execute on the organic growth projects, thereby continuing on its journey to reach 1mtpa of automotive aluminium sheet across North America, Europe and China (Q4FY21 portfolio mix was 19%, will gradually move up to 22-23%). This includes 200kte of greenfield expansion in Kentucky, US and 100kte brownfield expansion in Changzhou, China. Brazil recycling expansion to commission by end of Q1FY22, while rolling capacity upgrades will end by FY22. Also, Novelis has been able to achieve US$79mn of run-rate combination synergies with Aleris through FY21. Groundbreaking for new US$325-375mn cold mill in Zhenjiang, China is expected in mid-FY22 and will help capture US$65mn of additional synergies.

- Novelis capital allocation framework. Novelis reiterated four key aspects of its capital allocation framework i) reinvest in core business ii) execute debt reduction plan iii) Maintain adequate liquidity and ensure capital repatriation to shareholders.

i) Reinvest in core business. Novelis has identified 5 year organic growth capital expenditure of US$1.5bn along with US$300mn of annual maintenance capital expenditure over next five years. FY22E total capital expenditure has been pegged at US$600-700mn.

ii) Execute debt reduction plans. US$2.6bn of total debt reduction plan through FY21/FY22E, thereby targeting 2.5x Net Debt to EBITDA over the medium term. Through strong cash flow and divestment proceeds, Novelis has reduced gross debt by US$2bn since acquisition in Q1FY21.

iii) Maintain adequate liquidity and repatriate cash to Hindalco. What the debt reduction target for FY22E highlights is US$700mn of FCF, similar to FY21E. Management has adjusted for higher capex (higher US$165mn YoY) and higher working capital requirements. As highlighted in the capital markets day earlier, 8-10% of FCF before growth capex will be repatriated to Hindalco (~ US$100mn p.a).

- Maintain HOLD. As we look ahead in FY22/23E, we see limited earnings tailwind from Novelis (vis-à-vis expectations). From here on, with a FY23E LME assumption of US$2000/te, RoE of 12.4% and attributed P/B of 1.13x, we maintain HOLD with a target of Rs 417/share (0.9x earlier). Novelis as an earnings trigger is largely exhausted in our view, allowing the LME induced volatilities to drive share price performance from here on.

Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.383 as compared to the previous close of Rs. 398.7. The total number of shares traded during the day was 1520075 in over 14758 trades.

The stock hit an intraday high of Rs. 405.7 and intraday low of 368.35. The net turnover during the day was Rs. 579833220.

Source : Equity Bulls

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