Hindalco Industries (Novelis) (Outperformer) - Another solid quarter amid adverse macro
Novelis Q2FY20 result – EBITDA sustains at higher level
Novelis reported its highest ever adj EBITDA of US$374m, up 1% qoq (5% yoy) (IDFCe: US$345m) on the back of higher volumes, favourable pricing conditions and continued strong demand in North America and favourable product mix. It reported EBITDA/t of US$448, flat qoq (up 2% yoy).
- Volumes, at 0.835mt, were up 3.5% yoy. Beverage cans and automotive demand remained strong in North America (reported volume down 3% yoy to 0.286mt but Q2FY19 included ~10,000t volume shipped from Q1FY19, adjusted for that volume was flat yoy). On the other hand, soft demand from automotive market in China and Europe was offset by strong beverage can demand. As a result, volumes in Asia increased 5.4% yoy to 0.177mt whereas volumes in Europe increased 7.0% yoy to 0.245mt. Volumes in South America increased 12% yoy to 0.141mt.
- Adjusted EBITDA, at US$374m, was up 5.4% yoy due to higher volumes (US$23m), improved pricing and mix (US$7m) offset by lower scrap spreads and other costs (US$14m).
- Net debt stood at US$3.44bn (US$3.54bn at Q1FY20-end) with net debt/EBITDA of 2.4x.
- Management expects to close Aleris acquisition by Jan 21, 2020, subject to regulatory approvals.
Key positives: EBITDA/t of US$448, Volume growth
Key Negatives: Softening scrap spreads outside North America
Impact on financials: Will review post Hindalco’s result on 11th Nov, 2019
Valuation & view: Reiterate Outperformer with TP of Rs259
Favourable market conditions in North America continue to drive Novelis’s earnings. While, outlook for North America remains strong, strong beverage can demand in other regions will continue to support earnings. Novelis has achieved EBITDA/t of US$448 and EBITDA of US$746m in H1FY20. We expect EBITDA/t to sustain at US$410+ in coming quarters (factored in EBITDA/t of USD414 in FY20 and USD416 in FY21). Novelis’ earnings will support Hindalco’s earnings amid weak aluminium prices. We value the India operations at 5.0x FY21E EV/EBITDA (Rs80) and Novelis at 6.0x FY21E EV/EBITDA (Rs179) and arrive at a TP of Rs259. 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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