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Buy Hindalco Industries; target of Rs 310: Motilal Oswal

Motilal Oswal is bullish on Hindalco Industries has recommended buy rating on the stock with a target price of Rs 310 in its research report dated September 13, 2017.

September 20, 2017 / 11:23 AM IST
 
 
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Motilal Oswal's research report on Hindalco Industries


HNDL's business is robust and de-risked. Novelis and copper segments operate on conversion model, with LME being a pass-through. These two businesses account for more than 60% of EBITDA, and provide steady cash flows and support balance sheet. Aluminum smelting is a high margin business; volatility is correlated to metal cycle. HNDL is present across the entire value chain of aluminum. There are only few comparable global companies: Norsk Hydro and Hongqiao. Most other players are either only upstream or only downstream producers. Superior technology (Pachney) selection for its smelters has helped it achieve stable operations, while competition is struggling to stabilize GAMI pots (Chinese). HNDL has access to high quality bauxite, strong logistics, and conveyors for bulk transportation of minerals from mines. It has secured a diversified mix of coal supply in proximity to its captive power plants. This has helped it achieve cost leadership in aluminum production, globally. Novelis has global leadership in supplying flat-rolled products to the auto industry. Novelis will continue to look for expansion in the auto space to cater to strong growth in demand. New investments are expected in the US and China. Pricing pressure in can business has eased. Electric vehicles are likely to accelerate light-weighting and drive demand for aluminum.  HNDL continues to focus on accelerated deleveraging and allocation of capital in downstream, which is less capital intensive. HNDL has already prepaid INR78b debt and plans to prepay another INR30b during FY18. There is merit in hedging primary aluminum production, as it helps tide over volatility in LME and provides net gains because forwards curves have always been in contango.

Outlook
We remain bullish on the stock due to (a) strong business fundamentals, (b) free cash flow generation, and (c) the managements' focus on deleveraging, high IRR projects, and attractively-valued inorganic opportunities so as to deliver stakeholder's value. We re-iterate BUY, with a target price of INR310/share (6.5x FY19E).

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first published: Sep 20, 2017 11:23 am

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