PL Stock Report: Hindalco Industries (HNDL IN) - Visit Update – Focus on downstream expansion & innovation - BUY

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

Rating: BUY | CMP: Rs469 | TP: Rs557

Visit Update – Focus on downstream expansion & innovation

We visited Hindalco Industries (HNDL) FRP unit at Hirakud and Aditya Aluminium smelter complex at Odisha. Phase-II FRP expansion is on track to be commissioned by FY25 end to drive volume growth. The company is focusing on downstream capacity additions, improving metal purity & productivity and reducing carbon footprint at Aditya. Upstream expansion is subject to success of round the clock availability of green energy.

We believe HNDL is well placed amongst the metals space as a) Novelis is expected to witness gradual improvement in per ton EBITDA over next few quarters, led by resilient developed economies and gradual improvement in consumer demand from China; b) fall in thermal coal prices and opening 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. The stock trades at EV of 6.5x/5.1x FY24E/FY25E EBITDA. Maintain ‘Buy’ with TP of Rs557.

Hirakud FRP expansion on track: We visited 135ktpa flat rolled product manufacturing unit at Hirakud. India’s only 1+3 stand 4-HI aluminium hot rolling mill (HRM) was shifted from Novelis Rogerstone facility, UK in FY13 and capex for new 135ktpa cold rolling mill (CRM) was incurred to set up this FRP project. In FY22, HNDL planned a capex of USD 450 mn for casting and cold rolling mills at Aditya (~40 km from Hirakud) and Hirakud to expand its domestic FRP capacity from 135ktpa to 305ktpa under phase-II while another 170ktpa FRP capacity addition is feasible with existing HRM capacity in the next phase as Aditya has enough available land and HRM capacity at Hirakud (~700 ktpa). Commissioning of cast house and CRM at Aditya is expected by Oct-24, which should drive volume growth FY26 onwards.

Aditya Smelter benchmarked best among global AP30 peers: Aditya Aluminium Smelter with manufacturing capacity of 360ktpa is located at Sambalpur district in Odisha. The complex is set up over 3,300 acres of land well connected by rail and road for raw material and finished goods movement. The smelter has latest AP36S technology of Rio Tinto Alcan (RTA) 360KA pots with 900MW CPP and 30MW solar, much superior in technology, digitization, safety and cleanliness over peers. HNDL has entered into commercial agreement with Greenko Energies to set up renewable energy project for supply of 100MW round the clock carbon free power in Aug-22, once this pilot project gives desirable results HNDL might tie up with state government for 1000MW solar panels over Hirakud reservoir supplying energy to own smelters and can double its capacity in the long run as environmental clearance has already been obtained for 0.72mtpa capacity at Aditya.

CPP: We also visited 900MW captive power plant (CPP) of Aditya smelter located inside the complex. Daily coal requirement is ~11kt. CPP has coal supplies from linkage from MCL & SECL by rail/road (35%), e-auction (40-45%) and rest 15% comes from own Gare Palma mines IV/4 and IV/5 (~135km in Chhattisgarh). With coal prices rationalizing post Covid-19 impact, it is expected to lower cost of operation in the coming few quarters.

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