Shares of Hindalco Industries rose as much as 4.5% in intraday trade on BSE on August 4, boosted by a healthy Q1 show by its subsidiary Novelis. The stock finally closed 1.80% higher at ₹421.75.
Novelis reported a strong Q1FY23 scorecard, with net sales and adjusted EBITDA at $5 billion and $561 million, respectively.
The company said it delivered a record adjusted EBITDA/ton of $583 after a record year even as it acknowledged that supply chain challenges, inflationary pressures, geopolitical instability and foreign exchange volatility limit visibility.
It sees stable demand for sustainable aluminium solutions across end markets.
"Given the growing market, we are vigorously allocating capital to continue to grow alongside our customers, with more than $4.5 billion of investment opportunities on our horizon," said Devinder Ahuja, Executive Vice President and Chief Financial Officer, Novelis.
The company said it continued maintaining a strong total liquidity position of $2.4 billion as of June 30, 2022.
Brokerages remain positive
The healthy Q1 scorecard of Novelis attracted positive reviews from brokerages and most of them are bullish on its holding firm Hindalco.
As reported by CNBC-TV18, CLSA maintained a 'buy' rating on the stock of Hindalco and observed that strong Q1 results and robust guidance should allay concern regarding the stock. CLSA said Novelis posted best-ever profitability and its Q1 EBITDA was meaningfully above estimates.
Among the domestic brokerages, Motilal Oswal Financial Services has a buy call on the stock with a target price of ₹490, implying an 18% upside. As per its estimates, the stock is trading at an FY23E and FY24E EV/EBITDA of 5.3 times and 5.1 times, respectively. The stock is available at 1.3 times FY23E P/B while offering an attractive RoE (return on equity) of 18%, Motilal said.
Motilal Observed that with an improvement in semiconductor supplies, Novelis' North American performance drove the overall beat in adjusted EBITDA. The rolling over to new contracts, at a higher margin, is also helping improve its EBITDA/t profile.
Motilal highlighted that the company raised its FY23 EBITDA/t guidance to $525/t (from $500/t in Q4FY22), backed by its strong performance in Q1. This guidance may be on the conservative side as the implied EBITDA for nine-month FY23 works to USD505/t, said Motilal Oswal.
The brokerage firm has slightly raised its FY23 estimates for Novelis, given its strong performance in Q1.
"We have reduced our FY23 volume estimate marginally by 1% to 3.96mt (versus 4mt earlier), but raise our EBITDA/t by 4%, resulting in a 3% improvement in EBITDA to ₹165 billion versus ₹160 billion," said Motilal Oswal.
Motilal also added that Novelis continues to enjoy a strong leadership position in the secondary aluminium business. With nearly 58% sales in can sheets, which is a recession-resistant business, and automotive demand recovering, the company is well poised to reap the benefits from its organic expansion, said the brokerage firm.
Kotak Securities also has maintained a 'buy' call on the stock with a target price of ₹550.
"Novelis’ Q1FY23 adjusted EBITDA was much ahead of our estimates led by a sharp recovery in margins in North America. We believe that the concerns around economic slowdown in the West and its impact on Novelis business are overblown. A tight end-use market should allow Novelis to pass on cost inflation and maintain its robust margins. Resilient earnings at Novelis would help cushion the contraction in Indian aluminium spreads," Kotak said.
Centrum Broking pointed out that Novelis' management revised its sustainable EBITDA/t guidance to $525 from $50+ earlier which should be treated positively as it has been provided despite fear of recession in the developed world.
"Our FY23E EBITDA is unchanged while we increase FY24E EBITDA by nearly 1% (EBITDA/t of USD530 in FY23E and USD541 in FY24E). With lower capex in FY23E and increased confidence in numbers, our fair value is revised upwards to ₹523 (earlier ₹473), valuing Novelis at 6.5 times (earlier 6 times) FY24E EV/EBITDA and Indian operations at 4 times FY24E EV/EBITDA," Centrum said.
According to a MintGenie poll, an average of 21 analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations in this article are those of individual analysts or broking firms and notMintGenie.