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MOSL . HINDALCO: Strong earnings beat, Novelis raises its FY23 guidance

HINDALCO: Strong earnings beat, Novelis raises its FY23 guidance

(HNDL IN, Mkt Cap USD11.8b, CMP INR414, TP INR490, 18% Upside, Buy)

• Novelis reported a strong 1QFY23, with net sales/adjusted EBITDA/APAT at USD5b/USD561m/USD279m, up 11%/12%/+2% QoQ. With an improvement in semiconductor supplies, its North American performance drove the overall beat in adjusted EBITDA.
• Shipments in 1QFY23 were marginally lower at 962kt (down 3% QoQ, flat on a YoY basis). EBITDA/t stood at USD583 (up 12% YoY and 34% QoQ), higher than our estimate of USD501/t.
• The management highlighted that they have now hedged ~80%/50% of its FY23/FY24 energy needs in Europe, and is currently in a comfortable position to raise its profitability guidance further.
• Net debt, at USD4.5b, was marginally higher (by USD64m) on a QoQ basis. Leverage remains at a comfortable level of 2.2x.

 

FY23 EBITDA/t guidance raised to USD525/t

• The company raised its FY23 EBITDA/t guidance to USD525/t (from USD500/t in 4QFY22), backed by its strong performance in 1Q. This guidance may be on the conservative side as the implied EBITDA for 9MFY23 works to USD505/t.
• This is on top of USD500/t guidance by the company in 4QFY22. As highlighted by the company in 4QFY22 also, semiconductor availability issues continue to ease. The rolling over to new contracts, at a higher margin, is also helping improve its EBITDA/t profile.
• However, working capital remained elevated with high LME aluminum prices in the quarter. However, management expects working capital release during the rest of the year as LME aluminum has corrected. The working capital release will ensure leverage remains under control and that operating cash flow suffice for its capex.

 

Valuation and view

• We have marginally raised our FY23 estimates for Novelis, given its strong performance in 1Q. We have reduced our FY23 volume estimate marginally by 1% to 3.96mt (v/s 4mt earlier), but raise our EBITDA/t by 4%, resulting in a 3% improvement in EBITDA to INR165b (v/s INR160b).
• Novelis continues to enjoy a strong leadership position in the secondary aluminum business. With ~58% sales in can sheets, which is a recession-resistant business, and automotive demand recovering, the company is well poised to reap the benefits from its organic expansion.
• Leverage remains in control at 2.2x, with a marginal change in its net debt position. Novelis expects a capex of USD1.3b to be funded mostly through internal accruals, barring some wild swings in costs or prices on the LME.
• We marginally raise our SoTP-based TP for HNDL to INR490 from INR475. The stock is trading at n FY23E/FY24E EV/EBITDA of 5.3x/5.1x. The stock is available at 1.3x FY23E P/B, while offering an attractive RoE of 18%. We maintain our Buy rating.