Moneycontrol Bureau
Bank of America Merrill Lynch (BoAML) has reinstated its coverage of Hindalco Industries with a buy rating and target of Rs 148, implying 25 percent potential upside. The stock touched fresh 52-week high of Rs 124.60, up 2.9 percent intraday on Tuesday.
Four key drivers for its buy rating are operating leverage; coal costs (45 percent of aluminum production cost) which should be better controlled as Coal India ramps up production; improving balance sheet; improving product mix in Novelis as specialty products rise from 21 percent to 30 percent of sales over next 3 years.
Ramping up alumimum plants provides operational leverage, which should result in EBITDA margin expansion of 100 basis points in FY16-18, says the brokerage, adding the increased availability of coal should benefit Hindalco as it would not be forced to import.
BoAML feels stabilising aluminum premiums and rising auto sheet volumes (fetching higher realisation) are good for Novelis' profitability.Novelis is a wholly-owned subsidiary and contributes 65 percent to consolidated EBITDA of Hindalco.
Novelis makes aluminum products (sheets, can stocks, etc) from primary aluminum. It works on the pass through of basic aluminum prices.
FY16 was a bad year for Novelis as falling aluminum premiums (producers charge this over LME prices) resulted in cash losses; Novelis does not hedge aluminum premiums and bills customers on spot prices, so it loses money when spot prices fall below the inventory carrying price.
At 13:08 hours IST, the scrip of Hindalco Industries was quoting at Rs 123.50, up Rs 2.40, or 1.98 percent on Bombay Stock Exchange.Posted by Sunil Shankar Matkar
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