BUY

Results Update Hindalco Industries Ltd Target Price

14th Feb 2024 Metals & Mining 660

Novelis Capex Overhang; Indian Operations Remain Strong

(CMP as of 13th Feb 2024)
Est. Vs. Actual for Q3FY24: Revenue – INLINE; Segmental EBITDA – BEAT; PAT– BEAT CMP (Rs) 510
Change in Estimates post Q3FY24 results Upside /Downside (%) 29%

FY24E/FY25E: Revenue: 0.5%/1.4%; EBITDA: 0.9%/9%; PAT: -1.3%/12.7% High/Low (Rs) 620/381
Market cap (Cr) 1,14,596
Recommendation Rationale
Avg. daily vol. (6m) Shrs. 62,60,489
 Upstream Aluminium CoP: In Q3FY24, the CoP came down by 3.3% QoQ, led by lower coal
No. of shares (Cr) 224
and CP coke costs. In Q4FY24, the CoP is expected to remain flat QoQ. Upstream Aluminium
shipments and revenue were flat YoY/QoQ at 333kt and Rs 7,971 Cr. Nonetheless, the
EBITDA/t grew by a robust 53%/17% YoY/QoQ to $880/t, led by lower input costs. Shareholding (%)

 Aluminium downstream EBITDA/t, however, declined by 35%/38% YoY/QoQ to $137/t Jun-23 Sep-23 Dec-23
mainly due to unfavourable product mix and lower realisation. The management said that this Promoter 34.64 34.64 34.64
fall is transitory and profitability is expected to recover in coming quarters as domestic demand
FII 26.25 27.01 27.89
for Aluminium is growing at a CAGR of 6-7% across product segments.
MF/UTI 11.13 11.42 12.86
 Copper business shipments grew by 9% YoY to 119kt (down 11% QoQ on the high base),
Fin Institutions 0.40 0.20 0.19
leading to an all-time high EBITDA of Rs 656 Cr, up 20% YoY. Also, the inner grooved tube
project is expected to be commissioned by the end of CY24. Others 27.58 26.73 24.42

 Novelis: Adj. EBITDA/t is up 33% YoY at Novelis; however, Capex escalation at Bay Minette
Financial & Valuations
spoils the momentum. The company’s Adj. EBITDA/t stood at $499/t (up 33% YoY, down 4%
QoQ), which was largely in line with our expectations. EBITDA/t is expected to reach the Y/E Mar (Rs Cr) FY23 FY24E FY25E
benchmark of $525/t in Q4FY24. Net Sales 2,14,454 2,28,978 2,42,502
Sector Outlook: Neutral. EBITDA 22,623 27,152 31,216
Net Profit 9,006 12,614 15,115
Company Outlook & Guidance: We see multiple levers to increase Novelis’ EBITDA/t towards
EPS (Rs.) 40.6 56.8 68.1
$600/t in the medium term. Moreover, net leverage at Novelis is expected to come down to 2.5x by
the end of FY24 vs. 2.7x in Q3FY24. Post that, the Capex intensity for Bay Minette will increase and PER (x) 12.6 9.0 7.5
the company will stretch the net leverage to a max 3.0x towards the end of the project over the next EV/EBITDA (x) 6.9 5.7 4.9
two years. Hindalco’s Indian operations are delivering robust results. The Capex overrun at Novelis P/BV (x) 1.1 1.0 0.9
has spoiled the longer-term growth momentum with slightly lower return expectations. We
ROE (%) 9.1 11.6 12.3
recommend the ‘BUY on Dips’ strategy.
Current Valuation: 5.7x EV/EBITDA on FY26 EBITDA. (Unchanged) Change in Estimates (%)
Current TP: Rs 660/share (Unchanged) Y/E Mar FY24E FY25E FY26E
Sales 0.5% 1.4% 2.3%
Recommendation: We maintain our BUY rating.
EBITDA 0.9% 9.0% -0.2%
Financial Performance: Hindalco’s Indian operations delivered robust performance. Overall PAT -1.3% 12.7% 0.6%
consolidated revenue stood in line (down 1%/3% YoY/QoQ), while reported EBITDA grew by
61%/4% YoY/QoQ (15% beat), led by strong upstream Aluminium and copper division. The ESG disclosure Score**
company’s consolidated PAT increased by 71%/6% YoY/QoQ to Rs 2,331 Cr, led by higher Environmental Disclosure 25.5
EBITDA. Social Disclosure Score 23.1

Outlook: With the upstream smelters in the 1st quartile of the cost curve and Capex focus on the Governance Disclosure Score 84.9
downstream assets at both India and Novelis, the capital allocation looks well-placed. However, the Total ESG Disclosure Score 44.5
FCF will be under pressure for the next 3 years as Capex intensity increases. Returns will be back- Sector Average 50.6
ended post the completion of expansion projects. Project execution at Bay Minette remains the key
Source: Bloomberg, Scale: 0.1-100. **Note: This score measures the
risk. amount of ESG data a company reports publicly and does not measure
the company's performance on any data point. All scores are based on
2020 disclosures. The Sector average is for NSE500 companies
Valuation & Recommendation: We continue to value the company using SoTP with a 12MF
EV/EBITDA target of 6.0x/5.0x/5.5x on FY26 EBITDA for Indian Aluminium, Copper, and Novelis
operations respectively and add investments at market price and CWIP at 50% to arrive at our TP Relative performance
of Rs 660/share. Our TP implies an upside potential of 29% from the CMP. We maintain our BUY
rating on the stock.

Key Financials (Consolidated)

(Rs Cr) Q3FY24 QoQ (%) YoY (%) Axis Est. Variance
Net Sales 52,808 -3% -1% 52,509 1%
EBITDA 6,322 4% 61% 5,501 15%
Novelis Adj EBITDA/t 499 -4% 33% 499 0%
Aluminum India upstream EBITDA/t 880 17% 53% NA
Aluminum India downstream EBITDA/t 137 -38% -35% NA
Source: Ace Equity, Axis Securities
PAT 2,331 6% 71% 2,197 6%
Net Debt 34,835 -7% -16% NA NA

Source: Company, Axis Research

Aditya Welekar
Sr. Research Analyst
Email: aditya.welekar@axissecurities.in

1
Key Concall Highlights

Group
 Consolidated Net debt stood at Rs 34,835 Cr as of Dec’23 (From Rs 37,613 Cr as of Sep’23) with net debt to
EBITDA at 1.43x from 1.66x. India's business is net cash at Rs 3,632 Cr with Net debt to EBITDA at -0.37 as of
Dec’23, from 0.13 in Sept’23. Novelis' net debt stood at Rs 38,467 Cr, with Net Debt to EBITDA at 2.65x as of the
end of Q3FY24 vs 2.69 in Q2FY24. All the strategic Capex in India is matched with the cash flow from the business
and is in line with the capital allocation policy.

Aluminium India – Upstream business

 Coal Mix: In Q3FY24, linkage coal percentage is steadily growing and is now at 60% vs 53% in Q2FY24, and e-
auction is 36%, and the remaining 4% is from own mines, import and other sources. Higher linkage coal
contributed to lower coal consumption cost (down by 3.3% QoQ) in Q3FY24.

 Captive coal mines: The company expects production of 0.5-1MT from the Chakala coal mine (5.5MT capacity) in
FY26, box cut is expected in CY24. The company is waiting for the official notification for operating the Meenakshi
coal mine (12MT). The company was allocated Meenakshi West (capacity of ~5 MT) which will take 2.5-3 years to
come online. Full captive coal integration will be achieved in the next 2 years.

 Hedge position: In India's Aluminium business the company is currently hedged around 22% of the commodity for
$2,636/t for Q4FY24. ~5% of the commodity for FY25 at a zero collar with a bottom of $2,200/t and ceiling of
$2,500/t. 50% of currency is hedged at 85.19.

 Alumina sales: In Q3FY24, external alumina sales stood at 167 kt, and in Q4 company expects to sell 180-190kt
of Alumina. ~180kt run rate is sustainable in future quarters.

Copper India

 The copper segment is doing well led by good electrification demand. The strategy is to go further downstream to
maintain higher EBITDA margins.

Novelis

 Capex: Total Bay Minette Capex is now revised to $4.1 Bn and ~$750 Mn will be spent on it by FY24. In the next
couple of years, the majority of the remaining $3.35 Bn Capex will be spent and the residual ~$100 Mn will be
spent in the third year. Capex escalation at Bay Minette is mainly due to escalation at civil and structural work.
Once phase I (600kt) of the Bay Minette plant is online (Capex intensity of $6,800/t), it can be easily ramped up
with a lower capital intensity of $1,500-2,500/t to double its capacity to 1,200kt.

 Near-term End market outlook: Beverage cans - Destocking is largely over. The US market is strong and South
America will strengthen as it enters the summer season. Europe, Mexico, and SE Asian nations, however, are to
remain weak. Automotive: Stable demand led by product mix and pent-up demand with no material impact of the
UAW strike. Speciality: Demand to move with economics, the B&C segment to be under pressure due to higher
interest rates. Aerospace: Strong demand for fleet replacement.

 Shipments guidance for FY25: Management did not give any specific shipment guidance. However, with the
normalisation of market recovery management expects volume growth to be largely in line with market growth.

2
 Rolling capacity: Current rolling capacity is 4.2 MT and the debottlenecking projects will add ~0.25 MT by FY25,
taking the total capacity to ~4.5MT and with 600kt Bay Minette in H2-CY26, the total capacity will rise to 5.1 MT+
by end of CY26.

 Recycling: Construction of a $365 Mn advanced automotive recycling centre in Guthrie recycling centre in North
America is nearly complete and it is on track to begin commissioning in Q1FY25. The project will have above teen
IRR, and it will increase the recycled content and will aid in EBITDA margins. Recycling % will steadily keep going
up from the current level of 61% in future.

Key Risks to our Estimates and TP

 Lower LME Aluminium prices than our forecasts.

 The key risk to our BUY rating is a slower pace of expansion of the growth projects leading to cost overrun leading
to lower returns.

Change in Estimates

New Old % Change

FY24E FY25E FY26E FY24E FY25E FY26E FY24E FY25E FY26E

Sales 2,14,454 2,28,978 2,42,502 2,13,375 2,25,921 2,36,981 0.5% 1.4% 2.3%

EBITDA 22,623 27,152 31,216 22,422 24,909 31,289 0.9% 9.0% -0.2%

PAT 8,985 12,614 15,115 9,104 11,190 15,031 -1.3% 12.7% 0.6%

LME Aluminum 2,208 2,245 2,293 2,208 2,245 2,293 0.0% 0.0% 0.0%
Novelis
500 515 576 502 513 503 -0.4% 0.5% 14.4%
EBITDA/t
Source: Company, Axis Securities

3
Hindalco Results Review
Rs Cr Q3FY23 Q2FY24 Q3FY24 Q3FY24 YoY QoQ QoQ BBG Vs.
Consolidated Actual Actual Axis Sec Est Actual % % vs Axis Consensus Consensus
LME Aluminum ($/t) 2,336 2,160 2,198 2,198 -6% 2% 0%
Revenues 53,151 54,169 52,509 52,808 -1% -3% 1% 48,117 10%
Total Expenditure 49,542 48,531 47,009 46,760 -6% -4% -1%

Novelis 2,848 3,998 3,780 3,783 33% -5% 0%

Aluminum Upstream 1,591 2,074 2,443 54% 18% NA
Aluminum Downstream 157 171 103 -34% -40% NA
Aluminum 1,748 2,245 2,076 2,546 46% 13% 23%
Copper 546 653 545 656 20% 0% 20%
All Other segments - - - - NA NA NA
Segmental EBITDA 5,142 6,896 6,401 6,985 36% 1% 9%
Unallocable Income/ (Expense) -1,212 -800 -900 -663 NA NA NA
EBITDA 3,930 6,096 5,501 6,322 61% 4% 15% 5,584 13%
Calculated EBITDA 3,609 5,638 5,501 6,048 68% 7% 10% 5,584 8%

EBITDA margin (%) 6.8% 10.4% 10.5% 11.5% 466 bps 104 bps 98 bps

Depreciation and Amortization 1,768 1,843 1,641 1,874 6% 2% 14%

Impairment Loss/ (Reversal) 61 26 - 183 200% 604% NA
Other Income 366 463 128 280 -23% -40% 119%
Interest Expense 934 1,034 946 944 1% -9% 0%
Exceptional Items - 33 - - NA NA NA
Tax -148 1,035 844 997 NA -4% 18%
P&L Discontinued Ops - - - - NA NA NA
Minority Interest - - - - NA NA NA
Share Of P/L Of Associates (Net of Tax) 2 - - 1 -50% NA NA

PAT 1,362 2,196 2,197 2,331 71% 6% 6%

Adjusted Attributable PAT 1,362 2,196 2,197 2,331 71% 6% 6% 2,395 -3%
EPS (Rs) Basic 6.14 9.89 9.90 10.50 71% 6% 6% 11.80 -11%

Net Debt 41,716 37,613 34,835 -16% -7% NA

Net Debt: EBITDA (x) 1.60 1.66 1.43

Novelis Adj EBITDA/t ($/t) 376 519 499 499 33% -4% 0%
Aluminum India upstream EBITDA/t ($/t) 576 751 880 53% 17% NA
Aluminum India downstream EBITDA/t ($/t) 210 221 137 -35% -38% NA

3rd party Shipments

Upstream shipment (kt) 256 245 254 -1% 4% NA
Downstream shipment (kt) 91 94 90 -1% -4% NA
India Primary Aluminum Total (kt) 346 338 338 344 -1% 2% 2%
Total Copper Metal sales (kt) 109 134 119 119 9% -11% 0%
Source: Company, Axis Securities

4
Hindalco Financials (Consolidated)
Profit & Loss (Rs Cr)
Y/E March FY 23A FY 24E FY 25E FY 26E
Total Operating income 2,23,202 2,14,454 2,28,978 2,42,502
Total Expenditure 2,00,317 1,91,832 2,01,826 2,11,286

EBITDA 22,885 22,623 27,152 31,216

Depreciation and Amortization 7,086 7,148 6,991 7,521
EBIT 15,799 15,475 20,161 23,695

Other Income 1,257 1,297 668 689

Share Of P/L Of Associates (Net of Tax) 9 3 - -
Less: Interest & Fin Chg. 3,646 3,869 3,594 3,709
Less: Impairment loss/(Reversal) 219 228 - -
Profit before tax 13,200 12,677 17,235 20,675
Provision for Tax 3,144 3,692 4,621 5,560
Reported PAT 10,056 8,985 12,614 15,115
Excp items 41 21 - -
Adjusted PAT 10,097 9,006 12,614 15,115

EPS (Rs/sh) 45.5 40.6 56.8 68.1

DPS (Rs/sh) 3.0 3.0 1.0 1.0
Source: Company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March FY 23A FY 24E FY 25E FY 26E
Net Block 75,849 76,041 84,774 94,189
Other Tangible assets 2,701 2,701 2,701 2,701
CWIP 7,340 15,724 16,936 17,090
Intangible assets 32,436 32,436 32,436 32,436
Investments 14,116 14,116 14,116 14,116
Inventories 42,958 41,274 44,070 46,672
Trade Receivables 16,214 15,579 16,634 17,616
Cash / Bank balance 15,368 16,832 18,996 24,607
Misc. Assets 17,835 17,835 17,835 17,835
Total assets 2,24,817 2,32,538 2,48,497 2,67,263

Equity capital 222 222 222 222

Reserves 94,584 1,02,923 1,14,869 1,29,762
Minority Interests 11 11 11 11
Borrowings 58,335 59,122 60,802 62,502
Def Tax Liabilities 8,650 8,650 8,650 8,650
Other Liabilities and Provision 61,059 59,654 61,987 64,160
Capital employed 2,24,817 2,32,538 2,48,497 2,67,263
Source: Company, Axis Securities

5
Cash Flow (Rs Cr)
Y/E March FY 23A FY 24E FY 25E FY 26E
Profit before tax 13,241 12,698 17,235 20,675
Depreciation 7,086 7,148 6,991 7,521
Interest Expenses 3,646 3,869 3,594 3,709
Non-operating/ EO item (1,575) - - -
Change in W/C (457) 914 (1,517) (1,413)
Income Tax (2,733) (3,692) (4,621) (5,560)
Operating Cash Flow 19,208 20,937 21,682 24,932
Capital Expenditure (9,842) (15,724) (16,936) (17,090)
Acquisition of business - - - -
Free cash Flow 9,366 5,213 4,746 7,842
Other Investments 1,721 - - -
Investing Cash Flow (8,121) (15,724) (16,936) (17,090)
Borrowings 701 5,791 1,680 1,700
Repayment of Borrowings (9,400) (5,004) - -
Finance cost paid (3,845) (3,869) (3,594) (3,709)
Dividend paid (890) (667) (667) (222)
Other financing activities 3,089 - - (0)
Financing Cash Flow (10,345) (3,750) (2,581) (2,231)
Change in Cash 742 1,464 2,165 5,611
Opening Cash 11,639 15,368 16,832 18,996
Closing Cash 12,838 16,832 18,996 24,607
Source: Company, Axis Securities

Ratio Analysis (%)

Y/E March FY 23A FY 24E FY 25E FY 26E
Operational Ratios
Sales growth (% YoY) 14% -4% 7% 6%
EBITDA growth (% YoY) -20% -1% 20% 15%
Op. profit growth (% YoY) -28% -2% 30% 18%
Net Profit growth (% YoY) -26% -11% 40% 20%
EBITDA Margin % 11% 11% 12% 13%
Net profit Margin % 5% 4% 6% 6%
Al: EBITDA/t (Rs/tonne) 66,881 56,165 56,771 63,418
Novelis: EBITDA/t ($/tonne) 478 500 515 576
Tax Rate % 24% 29% 27% 27%
Efficiency Ratios
Total Asset Turnover (x) 1.0 0.9 1.0 0.9
Sales/Gross block (x) 1.7 1.5 1.5 1.4
Sales/Net block(x) 3.0 2.8 2.8 2.7
Working capital/Sales (x) 0.1 0.1 0.1 0.1
Valuation Ratios
PER (x) 11.2 12.6 9.0 7.5
P/BV (x) 1.2 1.1 1.0 0.9
EV/Ebitda (x) 6.8 6.9 5.7 4.9
EV/Sales (x) 0.7 0.7 0.7 0.6
Return Ratios
ROE 11.7% 9.1% 11.6% 12.3%
ROCE 10.2% 9.2% 11.2% 12.2%
ROIC 8.7% 7.5% 9.4% 10.3%
Leverage Ratios
Debt / equity (x) 0.6 0.6 0.5 0.5
Net debt/ Equity (x) 0.4 0.4 0.3 0.3
Net debt/Ebitda (x) 1.6 1.6 1.4 1.1
Interest Coverage ratio (x) 6.6 6.1 7.6 8.4
Source: Company, Axis Securities

6
 Hindalco Price Chart and Recommendation History

(Rs)

Date Reco TP Research

04-Apr-22 BUY 660 Top Picks
27-May-22 BUY 510 Result Update
11-Aug-22 BUY 490 Result Update
15-Nov-22 BUY 515 Result Update
08-Feb-23 HOLD 470 Result Update
10-Feb-23 HOLD 470 Result Update
11-May-23 HOLD 470 Result Update
24-May-23 HOLD 470 Result Update
04-Aug-23 BUY 515 Result Update
08-Aug-23 BUY 515 Result Update
18-Sep-23 BUY 545 Pick of the Week
08-Nov-23 BUY 555 Result Update
11-Nov-23 BUY 555 Result Update
13-Feb-24 BUY 660 Novelis Result Update
14-Feb-24 BUY 660 Result Update
Source: Axis Securities

7
About the Analyst

Analyst: Aditya Welekar

Email: aditya.welekar@axissecurities.in

Sector: Automobiles

Analyst Bio: Aditya Welekar is a PGDBM in Finance with 12 years of experience in Equity
Market/Research.

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8
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock, but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward-looking estimates, valuation or recommendation for the stock

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NEERAJ NEERAJ CHADAWAR
CHADAWAR Date: 2024.02.14
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