PL Stock Report - Hindalco Industries (HNDL IN) - Q2FY24 Result Update - Novelis continues to deliver - BUY

Hindalco Industries (HNDL IN) – Tushar Chaudhari – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs482 | TP: Rs583

Q2FY24 Result Update – Novelis continues to deliver

Quick Pointers:

§ India aluminium business volumes grew 1.4% QoQ to 428kt; copper business EBIT grew strong 23% QoQ on 14% volume growth (134kt).

§ Novelis’s adjusted EBITDA per ton declined 5% QoQ to USD 519/t (-1% YoY) better than PLe of USD 462/t mn on strong (6% QoQ) volume growth

Hindalco Industries (HNDL) 2QFY24 Consolidated revenue grew 2% QoQ to Rs 541bn (PLe Rs 554bn) on stronger Novelis and copper business performance. Novelis’ Flat Rolled Products (FRP) volumes grew 6% QoQ to 933kt (-5.2% YoY; PLe 940kt) on stronger North America & European volumes. Consolidated EBITDA declined 2% QoQ to Rs 56.1bn (8% lower Vs PLe Rs61bn) despite lower input costs in India and better Novelis performance.

We believe HNDL is best placed amongst the metals space as a) Novelis is expected to witness gradual improvement in per ton EBITDA over next few quarters; b) opening up of captive coal mines to benefit India business post FY26; and c) rising focus on high margin value added products such as FRP expansion would drive volume growth from FY26. Despite business headwinds, Novelis continue to perform well and invest significantly in growth. We have raised our FY24/25/26E EBITDA by 6%/1%/4% respectively on robust Novelis performance. At CMP, stock is trading at attractive valuations of 5.2x/4.4x EV of FY25E/FY26E EBITDA. Retain ‘Buy’ rating with revised TP of Rs583 (earlier Rs557) valuing Novlies at 6.5x EV of Sept 2025E EBITDA, as we roll forward.

Novelis on track: Shipments grew 5% QoQ in N. America to 390kt; grew 2% QoQ to 256kt in Europe; declined 1% QoQ to 175kt in Asia and grew sharp 21% QoQ to 144kt in S. America. Lower beverage packaging shipments in Asia & South America and weak specialties in Europe affected volumes in 2QFY24. Beverage can destocking is largely over as per mgmt. and beverage can volumes are expected to improve in 2HFY24. Novelis incurred capex of USD 285mn during 2QFY24 (USD 333mn in 1Q) and maintained capex guidance on lower side of earlier given range of USD 1.5bn-1.8 bn for FY24. The USD 2.8bn Bay Minette greenfield project (600ktpa) is on track to be commissioned in FY26 and has already secured long term customer commitments for Beverage can capacity. Negotiations with Automotive OEMs are on track for rest of the capacity.

India volumes to improve further: India upstream aluminium business shipments declined 2% QoQ to 334 kt while downstream volumes grew 15% QoQ due to market recovery. Upstream AL EBITDA/t was up 9% QoQ at USD751 in 2Q vs USD691. Downstream AL EBITDA/t was flat QoQ at USD221. Strong 13% QoQ volume growth in copper business at 134kt led to stronger performance with EBITDA growth of 23% QoQ.

Global aluminium demand remains muted in near term: YTDCY23 global aluminium demand remains muted at 52.2mt as higher interest rates and inflation is keeping demand weak in developed nations, while in China demand (up 4.3% YoY to ~31.5mt) seems to be improving gradually. India demand remains strong in 2Q at ~1.3mt with ~10% YoY growth. Aluminium prices are expected to remain in a range of USD 2100-2300 in the near term, unless demand improves substantially.

Concall Highlights: (1) HNDL has reached 50% of its 2025 target of 300MW renewable energy (2) Sequentially coal cots were down 15% (3) India aluminium business, HNDL is hedged 11% at the price of USD2,755/t for H2FY24 (4) HNDL will invest ~Rs80bn in two phases for 2mtpa Odisha alumina refinery project and 160MW CPP at at Kansariguda. The investment shall be Rs60bn in the first phase of 1mtpa with 36 months’ timeline (5) The alumina expansion is planned to cater to the middle east markets and the pricing will be indexed to LME with contracts being long term (6) Q3 cost of production is expected to be flat w.r.t Q2 (7) Alumina sales in Q2 stood at 138kt (8) The Chakla coal mine is expected to start operations from Oct’24 (9) Coal mix in the quarter stood at linkage: 53%, e-auction: 40%, own mines: 5% and import: 2% (10) The Clyaton plant will be shut down as it is an old plant and the products do not have a strong future (11) HNDL maintained the guidance of Rs 5-5.5bn quarterly profit run rate in copper business (12) FY24 capex for Novelis is expected to be USD 1.5-1.8bn and Indian operations ~Rs40-45bn (13) The volumes from 30kt Silvassa extrusion unit will start from FY25 and the Sambalpur FRP is expected to commission in the end of next year. (14) Novelis’ beverage can volumes to improve in 2HFY24 as South America goes into summer, Auto and Aerospace demand to remain strong. High inflation & interest rates in developed world keeping Specialties volumes muted in the near term. (15) 3QFY24 is seasonally weak quarter for Novelis and volumes are expected to be muted due to planned maintenance shutdown. (16) Novelis EBITDA/t is expected to remain in USD450-500 range and by 4Q it will be in-line with guidance of USD 525/t.

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