Hindalco Industries (Novelis) (Outperformer) - Preparing for next leg of growth
Novelis Q4FY19 result highlights- Volume led growth
Amidst fear of global slowdown, Novelis, a 100% subsidiary of Hindalco, reported its best-ever adjusted EBITDA of US$357m (IDFCe: US$335m), up 11% qoq/12% yoy with EBITDA/t of US$410, up 1.9% qoq/ 3.5% yoy. The beat was primarily due to higher-than-expected volume (up 8.7% qoq/8.1% yoy to 870kt v/s IDFCe: 816kt) which is encouraging.
- Despite slow-down in auto demand in China and Europe, Novelis still recorded 3% yoy volume growth in auto to 165kt (19% of overall volume v/s 20% in Q4FY18) due to robust demand in US. Demand improvement in beverage cans led volume to increase by 13% yoy to 557kt (64% of volume v/s 61% in Q4FY18). Overall, volume was up 8.7% qoq/8.1% yoy to 870kt.
- Adjusted EBITDA, at US$357m, was higher 11% qoq primarily due to higher volume which offset lower favorable scrap spreads.
- Net debt reduced to US$3.4bn (US$3.7bn at Q3FY19-end) with net debt/EBITDA of 2.5x.
- Management is confident of completing Aleris acquisition by Q2FY20 without divesting any assets. Aleris too reported EBITDA of US$85m, up 57% yoy and EBITDA/t of US$383, up 49% yoy.
Key positives: Higher volumes, EBITDA/t of US$410
Key Negatives: Softening scrap spreads
Impact on financials: increase Novelis EBITDA by ~1.5% in FY20 and FY21
Valuation & view: Reiterate outperformer with TP of Rs305
Management reiterated its guidance of sustainable EBITDA/t of US$400+ for Novelis despite softening scrap spreads. The outlook of aluminium demand remains firm in beverage cans and can expect improving pricing going forward. Demand of auto sheets is expected to remain firm in US which will offset weak demand in China and Europe. The next leg of volume growth will start accruing from FY22 onwards with commissioning of autosheet facilities in US (FY20-end) and China (FY21) and beverage cans facility in South America in FY21. Aleris acquisition is expected to be completed in Q2FY20. We value the India operations at 5.5x FY20E EV/EBITDA and Novelis at 6.5x FY20E EV/EBITDA and arrive at a TP of Rs305. Reiterate Outperformer.
Hindalco Industries is engaged in the production and sale of aluminum and copper in India and internationally. Co.'s aluminum products include rolled products, extrusions, foils, primary aluminum ingots, billets, wire rods, and aluminum slabs; and aluminum chemicals, such as standard alumina, standard hydrate and specialty aluminas and hydrates for use in refractories, ceramics, fire retardant plastics, alum, and zeolite applications. Co. also offers aluminum foil and packaging solutions to pharmaceuticals, healthcare, dairy, confectionery, processed foods, personal products, and tobacco industries, as well as to the heat, ventilation, and air conditioning industries.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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