Shares of Hindalco Industries, the flagship metals company of the Aditya Birla Group, have fallen 16.57% to ₹436.50 apiece in the last one year. From their 52-week high of ₹636, the stock is down by 31.37%. Nevertheless, domestic brokerage firm Motilal Oswal has a positive outlook on the stock, stating that the stock at current levels is an attractive buy.
The company's subsidiary Novelis, which makes flat-rolled aluminium products, announced its Q3 FY23 earnings on Monday, with the net profit falling by 95% YoY to $12 million. Sequentially, the net profit was down 93.44%.
For 9M FY23, the net profit stood at $502 million, down by 33% YoY from the same period last fiscal year.
The net income from continuing operations, excluding special items, stood at $96 million in Q3, a 60% YoY drop. EBITDA came in at $341 million in the October-December quarter, which fell by 33% year on year from $506 million in the year-ago quarter.
Further, net sales came in lower at $4.2 billion for the third quarter of the fiscal year 2023, compared to $4.3 billion in a similar quarter of last quarter, primarily driven by lower average aluminium prices and a 2% decrease in total flat-rolled product shipments to 908 kilotonnes.
In addition, the adjusted free cash flow from continuing operations saw an outflow of $158 million for the first nine months of the fiscal year 2023, compared to a generation of $217 million in the prior-year period.
The net debt for the quarter stood at $ 4.7 billion, marginally higher by $103 million QoQ. However, leverage remained at a comfortable 2.6x at the end of the third quarter of the fiscal year 2023, up from 2.3x the previous year.
"As expected, our results were pressured by continued unprecedented inflationary headwinds, but were also further impacted by lower shipments resulting from significantly larger than anticipated customer inventory reduction actions in the beverage packaging market," said Steve Fisher, President and CEO, of Novelis Inc.
Motilal Oswal said the company's performance was affected by lower shipments due to beverage packaging destocking, higher inflation, high energy costs, and unfavourable forex and Covid-related shutdowns in Asian countries.
EBITDA was impacted by lower volumes, higher operating costs, and a negative forex impact of $18 million, it added.
"The company expects some headwinds for the next couple of quarters; however, we note that these temporary headwinds do not dent the structural margin improvement story of Novelis," said Motilal.
Some of the contracts are reset from January this year, and other contracts will be reset from April at much higher rates, which will help the company to improve margins and push for higher EBITDA/ton to $525 on a normalised basis.
The management has guided for a substantial release of working capital, which will lead to an FCF (free cash flow) of $400 million in FY23 as opposed to a negative FCF of $170 million in 9MFY23.
Both capex projects at Bay Minette and Guthrie are on track and will be funded through internal accruals. The release of working capital and funding of capex from internal cash generation should improve net debt/EBITDA, the brokerage pointed out.
"We note that the stock now fully reflects lower LME aluminium prices, a weak macro economy, recession in Europe, and rising inflation reflected in higher input costs and lower premiums. As a result, we believe that Novelis reflects strongly on long-term opportunities rather than focusing on just one-quarter of weak operating results," said Motilal.
The brokerage believes that the stock's decline following the third-quarter results should be considered as an opportunity to buy, as it remains optimistic about Novelis' long-term prospects and leadership in both the beverage can and automotive markets.
Motilal Oswal has a target price of ₹600, indicating a potential upside of 37.45% from the stock's previous closing price.
20 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
