Hindalco - Analyst Meet Update - B/S justifies the new capex; Rating downgrade due to limited upside

Mr. Kamlesh Bagmar, Deputy Head of Research at Prabhudas Lilladher

Quick Pointers:

- To spend capex of US$4.5-4.8bn/US$3.4bn in Novelis/India in next five years

- Guided to allocate 75% of cash flows (after working capital and maintenance capex) towards growth capex

Hindalco (HNDL) hosted analyst meet to explain its capex programs and capital allocation policy over next five years. Given the strong B/S and steep reduction in leverage, announcement of large capex in both Novelis and India was expected for last couple of quarters. The major chunk of capex (~75%) in Novelis would be spent on 600kt of integrated greenfield rolling & recycling mill in US and 450kt of brownfield rolling & recycling capacity in Brazil. Post expansion, Novelis' Rolling and Recycling capacity would increase by 45%/50% to 5.8mnt/3.9mnt by FY27e. In India, ~60% of capex would be spent on 180kt brownfield Aluminium (AL) smelter, 1mnt greenfield Alumina refinery and development of recently acquired coal mines in Odisha.

Novelis posted sharp expansion in margins over last one year. However, we see significant headwinds to its margins and volumes due to abnormal AL prices, narrowing scrap spreads and elevated cost pressures. We also believe that restricted supplies from Russia and high AL prices would result in restart of idle capacity in China. China's daily AL output increased to 9-month in February. Given the significant outperformance of stock, limited upside and reasonably priced valuations, we downgrade stock to Hold with revised TP of Rs673 (earlier TP of Rs645) with an EV/EBITDA of 6.6x FY23e.

Higher energy costs and chip shortage to impact Novelis' earnings in Q4FY22e: Due to unhedged energy exposure and lower shipments, Novelis earnings would take a hit of US$70-75mn in Q4FY22. Around 25% of its energy exposure in both North America and Europe is unhedged. Due to sharp increase in gas and power rates, company expects hit of US$40mn on unhedged exposure. While, company guided impact of ~US$30-35mn due to lower offtake by customers on account of semi-conductor chip shortage.

§ Upstream AL capacity expansion gets the maximum allocation: HNDL would invest US$3.4bn in Indian operations. Around 51% of the investment would go to expanding 1) Alumina capacity by 1.35mnt (including 1mnt of greenfield Alumina refinery) and 2) brownfield smelter capacity by 230kt. In downstream AL, no major expansion was announced in addition to ongoing projects. Company will invest US$459mn on developing two coal mines with total capacity of 14.0-16.5mnt to meet almost entire of coal requirement.

Expanding Novelis' capacity by ~29% to 5.8mnt: Novelis would add another 1.3mtpa capacity over and above ongoing expansion of 0.6mtpa to reach 5.8mtpa by FY27. Around 2/3rd of capex (US$3bn) would be spent in North America. It would spend US$0.85-0.95bn/US$0.3-0.4bn/US$0.4bn in South America/Europe/Asia.

Recycled content would increase further by 600bps: Company expects to increase recycled content to 67% by FY27 from current 61%. Share of recycled content in Beverage cans would increase further from current 75%. While, Building & Construction segment has limited scope for further increase as it is already at elevated level of ~90%. Share of recycled content in Auto is on lower side and has the scope to increase.

Shares of Hindalco Industries Limited was last trading in BSE at Rs. 599.80 as compared to the previous close of Rs. 631.00. The total number of shares traded during the day was 285297 in over 5793 trades.

The stock hit an intraday high of Rs. 623.00 and intraday low of 598.85. The net turnover during the day was Rs. 173201462.00.

Source : Equity Bulls

Keywords

HindalcoIndustries INE038A01020 PrabhudasLilladher AnalystMeetUpdate