Hindalco Industries - Scrap LME spread tightness doesn't augur well - ICICI Securities

Novelis Q3FY21 EBITDA surprised with adjusted EBITDA/te of US$537/te against expected US$485/te. Part of the beat has been on account of US$25mn favourable gain on customer contractual obligation in Europe (one-off). Further, buoyancy in South American operations where EBITDA expanded ~ US$17mn QoQ helped. These largely explain the EBITDA increase QoQ and ~70% of the EBITDA beat. Aleris EBITDA at US$50mn is flat QoQ (US$47mn in Q2FY21). Management highlighted that they are keenly watching the developing scrap tightness as Chinese imports pick up. Management is yet to indicate any change in EBITDA/te guidance. The impending weakness can reduce US$50-60/te from EBITDA (our estimate) given where the scrap-LME spreads were prior to the start of US-China trade war. We maintain HOLD.

- Deleveraging continues; Net debt to EBITDA will settle below 3x. Management guided for Net Debt to EBITDA to settle much lower than previously guided 3x given the pace of deleveraging and capital allocation plans on the horizon. Capex for FY21E will be US$450-500mn and FCF for 9MFY21 is US$205mn. Engineering study is underway for China cold mill investment with a probable budget of US$300mn. No major hot mill investments have been planned yet.

- Project update. Auto finishing line in Guthrie has been able to ship commercial coil in Dec, '21 - ahead of initial guidance. Management expects the asset to attain utilisation in three years. Changzhou; automotive finishing line in China is scheduled for commercial shipments from Q4FY21. Pinda (Brazil) expansion to support beverage can business is on track for commissioning by mid FY22. Volumes from South America, even without the Pinda expansion reached 158kte, and the resultant EBITDA of US$816/te (all time high and up US$60/te QoQ) explains ~30% of the quarterly beat.

- Tightening scrap LME spreads and the possible impact on EBITDA/te. Management stated that they need to watch the evolving scenario on the possible scrap market tightness (compression of Scrap LME spread) and its impact on EBITDA margins. EBITDA guidance stays at US$470-500/te. The tightness in the scrap market, as per management is due to i) increase procurement from China and ii) logistical challenges currently been seen across the globe. We believe that a tightening scrap LME spread can reduce EBITDA/te significantly and remains the key risks to medium term margin trajectory.

- Maintain HOLD. The end market outlook is on the mend, with increasing tailwinds in auto (driven by sustainability - EV and light weighting trend), beverage cans which contribute 51% of portfolio and continues to see shift from glass/plastic to cans. The key evolving trends that need a look out are i) increasing capacity of beverage can sheets across end markets ii) initial trends of weakening non-residential construction in North America iii) weakening scrap LME spreads.

Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.257.15 as compared to the previous close of Rs. 255.5. The total number of shares traded during the day was 775487 in over 6783 trades.

The stock hit an intraday high of Rs. 263.3 and intraday low of 253.65. The net turnover during the day was Rs. 200393495.

Source : Equity Bulls

Keywords