After an 18 percent rise in just 4 months since June 2023, brokerage house Axis Securities has picked Hindalco Industries as its top pick of the week. This is on the back of recovering EBITDA/t trajectory at Novelis, disciplined capital allocation, and easing upstream aluminum cost of production.
The brokerage has a ‘buy’ recommendation on the stock with a target price of ₹545, indicating an upside of over 12 percent from its current market price of ₹484.05, as of September 18.
Hindalco Industries is the metals flagship company of Aditya Birla Group. It is the largest primary producer of aluminum in Asia. Hindalco operates under three segments – low-cost vertically integrated Aluminum segment (1.3mt), the World’s largest rolling and recycling Novelis operations (4mt rolling and 2.5mt recycling facility) and custom copper smelting (0.42mt copper cathodes capacity.
Stock Price Trend
The stock has jumped around 18 percent in the last 1 year and just a little over 2 percent in 2023 YTD. It has given positive returns in 5 of the 9 months in the current calendar year, gaining the most in July, almost 10 percent and shedding the most in February, down almost 15 percent.
The stock hit its 52-week high of ₹508.80 last week, on September 14, 2023. Currently trading at 484.05, it is still 24 percent away from its record high of ₹636, hit on March 29, 2022. Meanwhile, it has advanced 35 percent from its 52-week low of ₹358.80, hit on September 28, 2022.
Earnings
Aditya Birla Group flagship Hindalco reported a 40.4 percent decline in its consolidated net profit to ₹2,454 crore for the first quarter ended June 2023 from ₹4,119 crore recorded a year ago. On a sequential basis, the profit remained flat at 1.7 percent from ₹2,411 crore earned during the January - March period.
Consolidated revenue for the company fell 8.3 percent on-year to ₹53,382 crore, as against ₹58,229 crore a year ago, and 5 percent from ₹56,209 crore recorded in the previous quarter.
Consolidated operating profit, calculated as earnings before interest, taxes, depreciation and amortisation (EBITDA), slumped 32 percent on year to ₹5,714 crore. Operating profit margin contracted a whopping 375 basis points to 10.78 percent.
The company said the decline in revenue was on account of unfavourable macros and subdued volumes.
“Despite significant market headwinds, Novelis continued to show sequential improvement in adjusted EBITDA and EBITDA per ton, backed by record sales of automotive aluminium sheets,” said Satish Pai, MD, Hindalco Industries.
“We will continue to strongly position our company for the future, by maintaining our focus on ESG, controlling costs, securitising resources, and driving downstream expansion,” Pai added.
Investment Rationale
Easing upstream aluminum CoP (cost of production): In Q1FY24, the cost came down by 2 percent QoQ. The management is anticipating a further decrease of 3 percent in Q2FY24 QoQ, primarily attributed to the notable decline in international coal prices, said Axis.
Recovering EBITDA/t: The brokerage informed that aluminum downstream EBITDA/t improved by 45 percent QoQ to $220/t in Q1FY24 and it is expected to stay above $200/t in the upcoming quarters as the destocking in the key cookware segment is now largely over.
Copper business: In Q2FY24, the EBITDA margin is expected to improve QoQ as it will produce CC rods from its own concentrate. In Q1FY24, plant maintenance forced the company to use external cathodes to meet the CC rod demand, which led to margin dilution, stated the brokerage.
Novelis margins on the recovery path: The management expects that the margin trajectory will see a gradual recovery in the future quarters. In H2FY24, EBITDA/t will gradually improve to $450-500/t and the long-term guidance of $525/t stands intact, said Axis. It models EBITDA/t at $490/t and $509/t for FY24/25E.
Outlook & valuation: With the upstream smelters in the 1st quartile of the cost curve and Capex focus on the downstream assets at both India and Novelis, the capital allocation looks well-placed, explained the brokerage. The robust business model will accrue free cash flow (FCF) generation post the near to mid-term pressure on FCF on account of higher Capex, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
