Hindalco’s (HNDL’s) Q2FY21 results were strong, as expected. India Ebitda increased 43% q-o-q to Rs 12.7 bn on LME recovery. With integrated CoP guided flattish v/s Q2FY21 and improved LME, profitability is expected to remain high despite ~58% of LME being booked at lower LME for H2FY21. We broadly maintain our FY21/FY22 estimate.
Hindalco remains our top pick in the Metals sector on expected deleveraging in FY22e. This would be supported by lower capex and strong FCF generation in Novelis on the back of volume growth and high margins.
Ebitda improves 15% y-o-y on lower costs: HNDL India (standalone + Utkal)’s Ebitda was up 15% y-o-y (43% q-o-q) on a higher rupee LME and lower costs (owing to input commodity deflation). Adj. PAT increased 100% y-o-y (2.5x q-o-q) to Rs 3.8 bn. The Aluminum segment’s Ebitda increased 32% y-o-y (25% q-o-q) despite lower volumes (303kt, -8% y-o-y), led by lower costs. Integrated CoP fell 20% y-o-y and was flattish q-o-q. Realisation fell 12% y-o-y (+9% q-o-q) to $2,111/t on ~3% decline in LME and lower share of VAP sales. Ebitda/t was up 34% y-o-y to $469/t.
The Copper segment’s Ebitda declined 32% y-o-y to Rs 2.1 bn on lower Tc/Rc (~23% lower for FY21), lower volumes (75kt; – 9% y-o-y), and lower by-product realisations. However, Ebitda improved 4.6x on a sequential basis owing to a 29% increase in volumes.
HNDL’s consolidated rev/Ebitda stood at Rs 312/51.7 bn (at +5%/+38% y-o-y). Adj. PAT stood at Rs 18.0 bn (+50% y-o-y). Consolidated net debt to Ebitda was at 3.52x as of 30th Sep 2020 (v/s 3.83x as of 30th Jun 2020). H1FY21 consolidated OCF/FCF (before acquisition) was at Rs 39.1/14.0 bn, up 5%/85% y-o-y, respectively, primarily due to lower capex at Rs 25.2 bn vs Rs 29.9 bn in H1FY20.
Management commentary – Aluminum CoP guided to remain low: Management has guided for aluminum CoP to be largely flattish q-o-q in Q3FY21. It is likely to increase ~2% in Q4FY21 as coal and furnace oil costs are expected to increase. Hindalco has hedged ~59% of its aluminum volumes for H2FY21 at $1,716/t and hedged the Rupee at 76.45.
Novelis divested Aleris’ Duffel facility during the quarter. However, it has received only EUR200 m v/s the agreed EUR310 m, with the differential being under arbitration. Hindalco has signed an agreement for the divestment of the Lewisport facility for a cash consideration of $171 m, valuing the facility at an EV of $330 m. Mgmt said the deal valuation was unfavourable due to the mandated divestment by the Department of Justice.
Management has increased its guidance for sustainable Ebitda/t at Novelis to $480–500 from earlier guidance of $450–475/t. It now expects higher synergy of $180 m from the Aleris acquisition v/s $150 m targeted earlier.
Valuation and view – Robust business with attractive valuation: HNDL is our preferred non-ferrous pick owing to its (i) robust volume recovery in both India and Novelis; (ii) strong primary aluminum business profitability; (iii) solid FCF generation, which should reduce leverage sharply; and (iv) reasonable valuation. The outlook for Novelis is positive due to resilience in the Beverage Can business and recovery in Auto demand. Moreover, with better cost control and accruing synergies from Aleris, we expect margins for Novelis to remain strong at $450+/t.
With >70% Ebitda contribution now coming from the non-LME business (Novelis), we also see relatively higher stability in HNDL’s earnings. While aluminum prices have recovered ~30%, higher aluminum inventory is a cause for concern with regard to price sustainability. We factor in average LME of $1,725/t in FY21e and $1,750/t in FY22E. A $100/t change in aluminum impacts HNDL’s FY22e EPS by 11% and our TP by 9%. The stock trades at 4.9x EV/Ebitda and 7.4x P/E on FY22e. We value it at Rs 275/share on an SOTP basis. Reiterate Buy.