Hindalco Industries (Novelis) Q3FY19 results (Outperformer) - Outlook firm; Guidance intact

Novelis Q3FY19 result highlights- Lower scrap spread, seasonality and lower automotive sales affects EBITDA

• Novelis, a 100% subsidiary of Hindalco, reported adjusted EBITDA of US$322m (IDFCe: US$341m), down 9.3% qoq (up 5.7% yoy) with EBITDA/t of US$403, down 8.5% qoq (up 9.6% yoy). We believe this is more sustainble EBITDA/t as the management too guided EBITDA/t of US$400/t on sustainable basis.
• Adjusted EBITDA was lower qoq primarily due to lower favorable scrap spreads(due to tightening scrap market and lower aluminium prices), marginal decline in volumes due to seasonality (1% qoq to 800kt), lower auto volumes in sales mix and higher one off freight cost in Brazil.
• Volumes in automotive segment were affected due to slow-down in auto demand in China and slow-down in demand by one of key customer in Europe.
• Net debt remained at US$3.7bn with net debt/EBITDA of 2.8x.
• Aleris acquisition to be completed by Q2FY20. Novelis has already arranged a bridge loan facility to fund the acquisition.

Key positives: EBITDA/t of US$400+

Key Negatives: Softening scrap spreads, adverse product mix

Impact on financials: Will review post Hindalco’s result

Valuation & view: Reiterate outperformer with TP of Rs346

The benefits of higher scrap spread is expected to taper off further in Q4FY19 but management’s guidance of sustainable EBITDA/t of US$400 for Novelis is positive. The outlook of aluminium demand remains promising in beverage cans and auto sheets across regions except weak auto demand in China. The next leg of volume growth will start accruing from FY22 onwards with commissioning of autosheet facilities in US and China (CY20) and beverage cans facility in South America in CY21. Aleris acquisition is expected to be completed in Q2FY20. With Aleris acquisition, HNDL’s ~65% of EBITDA will be based on conversion margin which is more stable in nature. Being in the lowest quartile of the world aluminium cost curve, HNDL’s Indian aluminium operation can withstand any downfall in aluminium prices. We value the India operations at 6.0x FY20E EV/EBITDA and Novelis at 6.5x FY20E EV/EBITDA and arrive at a TP of Rs305. Reiterate Outperformer.