21 May 2020
Update | Sector: Metals
TP: INR175 (+35%)
Well placed to tide over COVID-19 disruption
Hindalco (HNDL) has corrected ~40% in CY20 due to the double whammy of weaker
aluminum demand and margins on account of the COVID-19 pandemic and higher leverage
owing to Aleris’ acquisition. We believe the correction is overdone and reiterate our Buy
rating based on: (1) strength in Novelis’ beverage can business where volumes should not
be much impacted from COVID-19, (2) long-dated debt maturity profile and ample liquidity
in hand (~USD2b), which should help HNDL tide over the current crisis comfortably, (3)
consistent FCF generation (even in FY21), which should aid deleveraging, and (4) attractive
valuation with the stock trading at 0.7x Adj. P/B value and 5.3x FY22E EV/EBITDA.
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
291 / 3.6
221 / 85
Novelis – Beverage cans resilient, but weak auto sector to impact EBITDA
Beverage cans constitute nearly two-third of volumes for Novelis (ex-Aleris), which
has not seen much impact from COVID-19 due to strong at-home consumption trend.
Novelis’ auto finishing lines that constitute ~20% of its volumes, however, have been
impacted as its auto customers are either shut or operating at low production levels.
With weak outlook for automotive, we have built in sharply lower volumes for
Novelis in FY21 in this segment. This would also impact blended margin as auto is a
high margin business. As a result, we expect Novelis’ volumes to decline by 10% YoY
and EBITDA per ton to fall by 14% YoY to USD380/t in FY21, leading to a 23% YoY fall
in FY21E EBITDA to USD1.1b. We expect both volumes and margins to recover in
FY22E as auto sales normalize driving an expected 17% YoY EBITDA growth.
Financials Snapshot (INR b)
2020E 2021E 2022E
1,184.3 1,177.4 1,347.9
142.6 129.1 158.8
EBITDA (Rs b)
-18.4 -53.5 101.1
EPS Gr (%)
185.7 169.9 180.0
Shareholding pattern (%)
Mar-20 Dec-19 Mar-19
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
Lower LME to impact profitability of Indian operations
Due to demand concerns on account of COVID-19, LME Aluminum has declined by
~15% YTDCY20 to USD1,450/t and hit fresh 10-year lows (USD1,422/t). Lower LME
has a direct adverse impact on HNDL’s Indian operations, which is a commodity
aluminum supplier. While cost benefits (lower energy cost, higher linkage coal
supply, lower caustic soda cost, etc.) should help partly cushion the impact on
margin, we still estimate India EBITDA to decline 26% YoY in FY21 due to lower
volumes and LME price. We also expect LME to improve gradually from current 10-
year lows due to supply curtailments and average USD1,575/t in FY21 and USD1700/t
in FY22E. At current LME prices, >10% of the global smelters are operating at cash
losses, which we believe is unsustainable and would result in supply curtailments
bringing market balance. Moreover, hedged LME positions (19% volumes for FY21
hedged at a higher level of USD1,836/t) imply hedge premium of USD56/t in FY21E.
We estimate India EBITDA per ton at USD308/t in FY21E and USD383/t in FY22E.
Hit to SOTP from Aleris’ acquisition priced in
We estimate an adverse impact of INR33/share on HNDL’s SOTP from the Aleris
acquisition, based on 6.0x FY22E EV/EBITDA. Though the Aleris acquisition gives
HNDL a meaningful presence in the lucrative aerospace business, it has happened at
an inopportune time as aerospace has been impacted by COVID-19 and Max-737
issues for Aleris’ key customer Boeing. We estimate EBITDA of USD210/USD250m
(ex-Duffel) in FY21/22E, which makes the deal valuation look expensive at 11.7x/ 9.9x
FY21E/FY22E EV/EBITDA. However, given the sharp correction in HNDL’s stock price,
we believe this adverse impact on SOTP is already priced in.
Amit Murarka - Research analyst
(Amit.Murarka@motilaloswal.com) +91 22 6129 1538
Basant Joshi - Research analyst
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.