Buy Hindalco; target of Rs 234: Motilal Oswal

Hindalco (HNDL) remains our top pick in the metals and mining sector. Although volume growth is tapering, its commendable achievements in reducing cost of production, rising share of high-margin autos in Novelis’ volumes and strict discipline in capital allocation are driving strong free cash flows (FCF). Furthermore, rapidly declining financial leverage, refinancing of debt and resetting of interest rates will drive USD110m additional annual savings in finance cost, boosting FCF. Aluminum demand growth remains strong due to substitution of steel, copper and zinc in various applications. Downside risk to metal prices is very limited, as all-in aluminum prices are trading close to 10-year low. The stock trades at attractive EV/EBTIDA of 5.3x FY18E (adjusted to quoted investments). We value the stock at INR 234, 48% upside. Reiterating Buy.

OutlookUSD8b capex is now completely behind. After 10 long years, Hindalco has started generating free cash flows as the focus now is on sweating of assets and reducing cost of production. Strong growth in FCF and rapidly declining financial leverage are driving up equity value. We expect the stock to get re-rated, and thus assign a target price of INR 282/share based on 6.5x FY19E and 20% discount to value of quoted investments. Reiterating Buy.