Hindalco Industries (Novelis) Q1FY20 results (Outperformer) - Best ever profitability amid adverse macro
Novelis Q1FY20 result – Higher volumes and improved product mix boost earnings
Amid the global slowdown, due to improved product mix and regional presence across major geographies specially North America, Novelis reported highest ever quarterly adj EBITDA of US$ 372m, up 12% yoy (IDFCe: US$ 328m) despite less favourable scrap spreads. The growth in EBITDA came on the back of favourable prices, volume growth (4% yoy) and better product-mix.
- Reported volumes, at 830kt, were up 4.1% yoy. However, during Q1FY19, Novelis suffered volume loss of 20kt (10kt in North America due to auto customers’ unplanned shutdown and another 10kt in Brazil due to 10-day truck strike). Adjusted for the same, volumes were up 1.6% yoy. Demand of beverage can and auto industry remains robust in North America (volume up 5.5% yoy) while Asia too started seeing volume growth (up 4.6% yoy). Volumes in Europe declined 4% yoy to 223kt, whereas adjusted volumes in South America were flat at 135kt.
- Adjusted EBITDA, at US$372m, was up 12% yoy due to higher volumes (US$33m), improved product mix (US$32m) offset by lower scrap spreads and other costs (US$27m).
- Net debt stood at US$3.54bn (US$3.44bn at Q4FY19-end) with net debt/EBITDA of 2.5x.
- Management guides a delay in completing Aleris acquisition by Q3FY20 (earlier Q2FY20).
Key positives: EBITDA/t of US$448, Volume growth
Key Negatives: Softening scrap spreads
Impact on financials: Will review post Hindalco’s result on 9th Aug, 2019
Valuation & view: Reiterate outperformer with TP of Rs300
The continued high profitability in North American market along with improving profitability in Asia provides confidence that Novelis will surpass its sustainable EBITDA/t guidance of USD400+ in FY20 (factored in EBITDA/t of USD411 in FY20 and USD416 in FY21). The tightness in the beverage can market and focus on improving the product mix will help in increased profitability going ahead. This will support Hindalco’s earnings amid weak aluminium prices. During FY19, Novelis contributed ~58% to consol EBITDA which may increase given the improved financials of Novelis and weak aluminium prices affecting standalone earnings. We do not see any downside to our estimates to Novelis’s earnings. 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 Rs300. 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.
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