Prabhudas Lilladher recommended accumulate rating on Hindalco Industries with a target price of Rs 225 in its research report dated February 12, 2020.
Prabhudas Lilladher's research report on Hindalco Industries
Hindalco (HNDL) reported Q3FY20 earnings in line with our expectation. AL operation’s profitability would continue to improve on the back of lower cost of production (CoP). On the contrary, Copper (CU) operation’s earnings would remain under pressure in FY21e due to 20%+ fall in Tc/Rc margins (constitutes ~50% of contribution) and planned shutdown. Additionally, lower hedging gains (likely to be Rs10bn in FY20E) would further weaken earnings in FY21e. Hence, we believe that benefit of lower CoP in AL operations would fall short to offset the weaker earnings in CU operations and reduced hedging gains given less volatility. Novelis delivered strong quarter with EBITDA margin at US$430/t and flat volumes impacted by temporary destocking. However, headwinds on margins are clearly visible due to accentuating competition and contracting scrap spreads.
Incrementally, impending acquisition of Aleris would deteriorate earnings and B/S quality due to its cyclical portfolio, peaked-out margins and high debt. Hence, we maintain Accumulate with TP of Rs225 (earlier Rs230), EV/EBITDA of 6x FY21E.
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