Buy Hindalco; target of Rs 198: Motilal Oswal

Motilal Oswal 's research report on Hindalco

Hindalco (HNDL)’s global peers Constellium, Norsk Hydro, and Crown Holdings reported their 2QCY20 results recently. A read-through of these indicated a positive outlook for near-term volumes and margins at Novelis (HNDL’s overseas business). In 2QCY20, volumes declined by ~10% YoY in Beverage Can (weakness in Latin America and Europe), ~55% YoY in Automotive, and ~40% in Aerospace. However, demand is improving, with volumes in 3QCY20 guided to be much better. The Beverage Can market remained strong in North America, with volume growth even in 2QCY20. Conversely, the European Can market witnessed decline due to weakness in Southern Europe. South America also witnessed decline due to lockdown in April; however, demand rebounded sharply mid-May onward. Constellium informed that its capacity utilization in Automotive has now reached 80% on account of improving demand, although the outlook remains uncertain. Post the Aleris merger, segmental contribution to Novelis’ volumes stands at: ~50% from Beverage Can, ~20% from Automotive, and ~4% from Aerospace. The balance ~26% comes from Speciality, Building & Construction, and Truck Trailers. Implied volume decline in Novelis in 2QCY20 (1QFY21) from previously reported industry trends amounts to ~20% YoY, in line with our estimate.

Outlook

The stock trades at 5.6x EV/EBITDA and 9.0x P/E on FY22E, at a ~20% discount to the past 10-year average. We value it at INR198/share on an SOTP basis. Reiterate Buy.

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