Hindalco Industries (Novelis) (Outperformer) - On an expansion mode
Novelis Q3FY18 result highlights- Profitability improves further
- Novelis, a 100% subsidiary of Hindalco, reported the best ever Q3 operating performance with EBITDA of US$305m, up 20% yoy (6% higher than our est) and EBITDA/t of US$383, up 13% yoy and 2% qoq. This was primarily driven by higher volumes (up 6% yoy to 796kt), improved product mix with higher sale of automotive sheets (up 12 % yoy to ~150kt), improved operating efficiencies, offset by continued pricing pressure, albeit slowing down, in cans segment in Asia.
- EBITDA/t increased by 12.7% yoy to US$ 383 led by an improvement in profitability across all geographies.
- Net debt reduced by 2% qoq to US$3.85bn (Q2FY18: US$3.94bn) amid higher operating cash flows.
Key positives: FY18 adjusted EBITDA at upper end of the earlier guidance of US$1.15-1.2bn; guided sustainable yearly EBITDA/t of US$375-380.
Key negatives: Free cash flow guidance at the lower end of US$400-450m due to high working capital
Impact on financials: Have factored in FY18E EBITDA of US$1.195bn for Novelis. Will review numbers post Hindalco Q3FY18 results
Valuation & view: Remains top pick with TP of Rs322
Novelis restarted its capex plans to further strengthen its position in automotive sheet market which bodes well for its future growth. It announced US$300m capex to build 0.2mtpa aluminium sheet manufacturing facility in North America, expected by 2020. Also, it is making investment of US$245m to acquire Sierre plant in Switzerland which was earlier on a lease basis which could otherwise may create issues in future. The management has not denied a possibility of inorganic expansion but assured that net debt/ebitda will not go back to 5x (current net debt/ebitda is 3.2x). We expect net debt/ebitda to fall to 2.7x in FY19E after assuming capex on inorganic expansion, providing a room for organic expansion given the management’s long term net debt/ebitda target of 3.5x. We have pencilled in FY18 capex of US$250m and FY19E capex of US$600m. We value the India operations at 6.5x FY19E EV/EBITDA and Novelis at 7.0x FY19E EV/EBITDA and arrive at a TP of Rs322. 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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