23 February 2021
Update | Sector: Metals
Hindalco
Buy
BSE SENSEX
49,744
S&P CNX
14,676
CMP: INR316
On a firm footing
TP: INR390 (+23%)
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
HNDL IN
2,229
709.6 / 9.6
328 / 85
30/32/46
3124
Strong cash flows to support growth and deleveraging
In its virtual analyst meet on Feb 22, Hindalco (HNDL) laid out its strategy
and capital allocation roadmap for the next five years. While no new
capex plans were announced, the focus remains on growing the
downstream business in India and deleveraging the balance sheet,
supported by strong cash flows in both India and Novelis. Net
debt/EBITDA is targeted to fall to 2.5x by Mar’22 (from the peak of 3.8x in
Jun’20).
We reiterate HNDL as our top non-ferrous pick on the back of a 26% EPS
CAGR over FY21–23E, driven by strong volumes, margins, and
deleveraging. We roll forward our TP to Mar’22 and raise it to INR390.
Financials & Valuations (INR b)
Y/E MARCH
2021E 2022E 2023E
Sales
1,281 1,480 1,537
EBITDA
165.5 195.5 204.4
Adj. PAT
51.3
73.1
82.1
EBITDA Margin (%)
12.9
13.2
13.3
Cons. Adj. EPS (INR)
23.1
32.9
36.9
EPS Gr. (%)
31.9
42.6
12.2
BV/Sh. (INR)
181
211
245
Ratios
Net D:E
1.3
1.0
0.7
RoE (%)
13.1
16.8
16.2
RoCE (%)
8.4
9.8
10.1
Payout (%)
8.6
9.6
8.6
Valuations
P/E (x)
13.7
8.7
7.7
P/BV (x)
1.7
1.3
1.2
EV/EBITDA(x)
7.4
5.6
4.9
Div. Yield (%)
0.5
0.9
0.9
FCF Yield (%)
10.7
14.5
17.1
Shareholding pattern (%)
As On
Sep-20 Jun-20
Promoter
34.7
34.7
DII
25.1
27.3
FII
19.9
18.8
Others
20.4
19.3
FII Includes depository receipts
Stock Performance (1-year)
370
290
210
130
50
Hindalco Inds.
Sensex - Rebased
Sep-19
34.7
25.4
21.4
18.5
Focus on organic growth and deleveraging
The management expects to generate USD1–1.2b annual cash flow post
its normal working capital and maintenance capex. It plans to broadly
allocate this as follows: a) growth capex – 50%, b) deleveraging – 30%, c)
returns to shareholders – 8–10%, and d) balance to be retained in
treasury.
Allocation toward organic growth capex over the next five years is
accordingly guided at ~USD2.5–3.0b – ~USD1.5b in Novelis to grow its
capacity to >4.5mtpa (from 4mtpa currently) and the balance USD1–1.5b
in India to grow its Downstream business. At the same time, it does not
plan to entertain any inorganic growth opportunity.
Out of the post-Aleris acquisition (gross of debt of USD11.1b), HNDL also
plans to repay USD2.9b by Dec’22 – USD2.6b in Novelis and USD0.3b in
India. Net debt/EBITDA is targeted to fall to 2.5x by Mar’22 (from the
peak of 3.8x in Jun’20) – below the pre-Aleris acquisition level of 2.6x in
Mar’20.
HNDL has also revised its dividend distribution policy to now pay out 8–
10% of the consolidated FCF (pre-growth capex). We estimate this to
increase the dividend to INR2.5–3/sh from INR1.2/sh in FY20.
HNDL is our preferred non-ferrous pick owing to a) its strong profitability
in the India Aluminum business from its low-cost integrated operations
(top quartile globally), b) a positive outlook for Novelis, driven by
recovery in auto demand and cost synergies from Aleris, c) solid FCF
generation, which should reduce leverage sharply, and d) reasonable
valuations.
Moreover, with ~75% EBITDA now coming from the non-LME business
(Novelis), we see relatively higher stability in HNDL’s earnings.
Even on our conservative LME aluminum assumption of USD1,850/t, the
valuation is attractive at 4.9x FY23 EV/EBITDA. A USD100/t change in
aluminum price impacts HNDL’s FY22E EPS by 11% and our TP by 9%.
We value it at INR390/sh on FY23 EV/EBITDA – 5x for India and 6x for
Novelis. Reiterate
Buy.
Robust business trading at reasonable valuations; Buy
Amit Murarka - Research analyst
(Amit.Murarka@motilaloswal.com)
Basant Joshi - Research analyst
(Basant.Joshi@motilaloswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.