Share prices of Hindalco Industries fell more than 2 percent intraday on November 13 after the company reported a mixed set of earnings for the September quarter. Brokerages, however, remain bullish on the stock, citing potential of Aleris and Novelis to drive earnings.
The stock was quoting at Rs 197.45, down Rs 2.95, or 1.47 percent, on the BSE at 1300 hours, but it has gained 12 percent in the last three months.
Maintaining outperform call on the stock with a target of Rs 260, implying 30 percent potential upside from current levels, Credit Suisse said the company's EBITDA in Q2 was largely in-line. The aluminium business EBITDA was 11 percent above its estimates, though copper business profitability was hit by lower byproduct realisations and lower volumes, it said.
In the second half of FY20, the company expects no disruptions and costs for aluminium business to be flat to slightly down. Synergies between Aleris and Novelis could remain unchanged at $150 million, the brokerage said.
Motilal Oswal also reiterated its buy rating, with a target of Rs 245, up 22 percent), saying the stock was trading at attractive valuations of 5.6x EV/EBITDA and 9x P/E on FY21E.
"With slowing global demand and continuing tariff wars, aluminium LME remains weak. However, at current LME, more than 20 percent of global aluminium smelters would be in losses which we believe is unsustainable. Hindalco given its low-cost integrated production is well placed to benefit as LME recovers. Moreover, Hindalco continues benefiting from the strong outlook for Novelis' high-margin business," the brokerage said.
Aluminium business missed analyst expectations, but copper earnings beat estimates during the quarter ended September 2019.
The company's standalone profit declined 75 percent year-on-year to Rs 78 crore due to lower revenue and operating income.
Revenue from operations fell 8.1 percent to Rs 9,965 crore Yo , with 10 percent fall in the aluminium business and 6 percent decline in the copper segment. Even Novelis reported nearly 9 percent decline in revenue.
Operating profit during the quarter dropped 28 percent YoY to Rs 792 crore and the margin contracted 220bps YoY to 7.95 percent as power and fuel cost increased 61 percent to Rs 1,904 crore.
Aluminium EBITDA declined 4 percent QoQ (down 37 percent YoY) due to 8 percent QoQ lower EBITDA per tonne at $367 owing to lower realisation (LME down 2 percent QoQ).
Aluminium production and sales increased 2 percent QoQ to 330kt and 328kt, respectively. Aluminium VAP sales were up 5 percent YoY at 78kt, giving it 24 percent share in volume.
Copper EBITDA declined 3 percent QoQ (down 37 percent YoY) due to a 4 percent QoQ decline in EBITDA per tonne to $426 on lower realisation (LME down 5 percent QoQ). Copper production/sales were up 11 percent/flat QoQ at 84/82kt.
Hindalco reported consolidated EBITDA of Rs 3,630 crore in Q2FY20, higher than estimates of Rs 3,290 crore, primarily driven by out-performance at Novelis, said JM Financial. It also retained buy call on the stock, with a target of Rs 255, implying 27 percent upside from current levels.
Novelis earlier reported EBITDA of $374 million--higher than JM Financial's estimates of $338 million-- implying EBITDA per tonne of $448.
The brokerage said Aleris acquisition was expected in Q4FY20.
The company's FY20 capex guidance stood at Rs 2,000 crore for India business and $650-700 million for Novelis. The consolidated net debt to EBITDA stood at 2.8x as on September 2019 (against 2.7x in June 2019).
"Aluminium LME is low at $1,800 per tonne levels on the back of global trade friction. However, the metal fundamentals remain stable with continued deficit at World ex-China and China in CY19. Cost competitiveness in Hindalco's India operations driven by increased coal security, quick ramp–up of new capacities and high margins at Novelis/Aleris with higher proportion of automotive products in the mix continues to drive an upward earnings trajectory for the consolidated entity. Maintain buy," JM Financial said.
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