Analysts and brokerage firms have retained their faith in metals major Hindalco after the company made an investor presentation to show its future growth strategies.
The presentation revealed the strong demand scenario for its aluminum business while it also showed the company's India balance sheet has been deleveraged.
As brokerage firms highlighted, the company's management at its annual investor day announced $6 billion of fresh growth capex, in addition to $2 billion under progress, to be spent over FY2023-27 across divisions.
As underscored by the brokerage firm Kotak Securities, Hindalco's management has accelerated growth capex given sharp deleveraging (net debt/EBITDA of 1.4 times in FY22E from 2.8 times in FY20) and buoyant market outlook.
Hindalco has revised its capital allocation strategy for the next five years and now plans to spend 75 percent on growth capex, nearly 15 percent on deleveraging, and nearly 8-10 percent on shareholder returns.
Hindalco estimates free cash flow (pre-growth capex) of $2 billion per annum which would comfortably fund its $8 billion of growth capex over FY2023-27E, Kotak said.
The stock has witnessed strong gains in the calendar year so far. As of March 30 close, the stock has jumped over 26 percent on BSE against the gains of a percent in equity benchmark Sensex.
Post the investor presentation, several brokerages expressed their positive views on the stock and retained their buy calls on the stock. However, the recent gains in the stock seem to have kept the target price capped. Also,
Brokerages retain 'buy' call
Global brokerage firm Jefferies has a 'buy' call on Hindalco with a target price of ₹700, implying a 17 percent upside from the stock's March 30 closing of ₹599.80 on BSE.
Jefferies, as reported by CNBC-TV18, highlighted that the company is embarking on a growth phase with plans to spend $8 billion over the next five years. The global brokerage added that Hindalco's plan for Greenfield expansion at Novelis is aggressive for the current margin profile.
Domestic brokerage firm Motilal Oswal Financial Services has retained the 'buy' call on the stock while raising the target price to ₹750 from ₹700 earlier. As per the new target price, Motilal expects the stock to rise as much as 25 percent.
The brokerage firm underscored that the management sees strong demand for aluminum from major segments like beverage cans, automotive body sheets, specialties, and aerospace.
Motilal highlighted that the company is expanding both downstream and upstream to raise its aluminum capacity as well as the share of value add products, which will eventually reflect in an improved EBITDA margin.
Novelis is the largest secondary aluminum producer and the largest aluminum recycling company globally. Novelis has a 40 percent global market share in can body stock, where demand remains robust, Motilal observed.
"The stock trades at 4.8 times and 5.8 times our FY23 and FY24 EV/EBITDA estimate, respectively. We raise our FY22/FY23 EBITDA estimate by 2.4 percent/6.6 percent, led by a 0.6 percent/10 percent increase in LME aluminum prices and raise our SoTP-based target price to ₹750 from ₹700 earlier. The key risk to our call is a slowdown in
China, resulting in a correction in aluminum prices," said Motilal Oswal.
Brokerage firm ICICI Securities has maintained a buy call on the stock with a target price of ₹700, expressing faith in the company's growth plans. However, the brokerage firm added that it would have ideally liked to see an upping of the EBITDA/te guidance as well. "In the absence of the same, the return potential for incremental investment appears to be a notch below what has been achieved in the previous Novelis expansions (FY11 + FY19)," said ICICI Securities.
Kotak Securities also has a buy call on the stock with a target price of ₹650 and said the new projects are return-accretive and could potentially add $1.3 bn EBITDA in FY2027E, however, back-ended returns would test investor patience.
Market sentiment on the stock is ‘neutral’, according to a MintGenie poll and an average of 23 analysts has a ‘strong buy’ call on the stock.
Shares of Hindalco Industries fell almost 4 percent in early trade on BSE on March 31. It traded 3.63 percent lower at ₹578 at 11.30 am.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
