Hindalco Industries - Novelis - pulling up consolidated RoE profile - ICICI Securities

Novelis's Q1FY21 results were higher than expectations, mainly helped by resilient Asia performance. Reported 10 Q EBITDA (without adjusting for either Metal price lag or unrealised derivative losses as those are normal part of business) was US$203mn. Q1FY21 was an exceptional quarter, nevertheless near Zero EBITDA from Aleris (not adjusting for unrealised derivative losses) is not an auspicious start (first quarter of integration). The guidance remains strong at US$450-470 of EBITDA/te on a consolidated volume of 4mnte and eventual volume of 4.2mnte post China expansion. Higher contribution from Novelis is not only reducing the EBITDA volatility, but also increasing the RoE profile slowly. We maintain BUY with a revised target of Rs 224/ share (Rs 190/share earlier).

- Q1FY21 surprised on the back of resilience in Asia EBITDA. Rest of the regions dropped EBITDA along expected lines. The demand resilience in Chinese Autos continue to benefit Novelis, battery enclosures on account of strong EV demand, strong electronics demand helping specialty sales - Chinese demand resilience helped Novelis's results. Expectantly, metal price lag impact of US$20mn was seen (Novelis + Aleris). Auto volumes fell 50% YoY, and are back on course of recovery. Aleris, it appears, had negligible EBITDA to report ex adjustment for unrealised losses on derivatives and its share of metal price lag. First quarter of an expensive acquisition fell much short of initial expectations - albeit the quarter was exceptional.

- Management commentary continues to be strong. Key tenets of guidance, which lead us to increase our Novelis EBITDA estimate for FY21/22 are i) being FCF positive in FY21 (ex the acquisition money paid) and ii) US$450-470/te of consolidated EBITDA on 4mnte volumes; volumes are to increase to 4.2mnte post expansion in Novelis China. Management has factored in US$150mn of synergies (~ US$35/te) for the EBITDA guidance (FY21E should see capture of US$80-90mn) and gradual ramp-up of aerospace volumes (higher margin). Management was also confident to overcome the synergy targets of US$150mn with more than 50% to be captured out of Chinese operations. However, we continue to normalise the guidance due to two factors i) high scrap LME spread continue to support margins ii) increased dependance on Auto volumes, which has an element of cyclicality as Q1FY21 witnessed and iii) significant currency tailwinds in Brazil - a simple addition of the segment income bridge highlights nearly US$183mn of EBITDA addition on account of forex tailwinds from the region between FY11-20.

- Maintain BUY. Increased contribution from Novelis and Aleris, not only reduces EBITDA volatility, but also has started to improve business RoEs. We have reduced LME estimates to US$1900/te (from US$1950/te earlier), yet the improved RoE profile of > 9% helps us to increase the target price to Rs 224/share (P/B of 0.77x).

Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.183.85 as compared to the previous close of Rs. 183.5. The total number of shares traded during the day was 971296 in over 5755 trades.

The stock hit an intraday high of Rs. 189.45 and intraday low of 180.65. The net turnover during the day was Rs. 179647662.

Source : Equity Bulls

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