MOSL: HINDALCO | Novelis (Buy) - Strong 4Q, net debt down by INR44b in FY18 - Valuations attractive
HINDALCO | Novelis: Strong 4Q, net debt down by INR44b in FY18; Valuations attractive; Re-iterate Buy
(HNDL IN, Mkt Cap USD8.0b, CMP INR239, TP INR370, 55% Upside, Buy)
- Strong 4QFY18 as expected: Novelis delivered its best-ever quarterly adj. EBITDA of USD319m (+9% YoY, +5% QoQ), driven by higher volumes, an improved product mix, operating efficiencies and favorable scrap spreads, partially offset by lower beverage can (BC) pricing. EBITDA/t increased 7% YoY (+3% QoQ) to USD396.
- INR44b debt reduction in FY18: EBITDA increased 12% YoY to USD1.2b. FCF rose 12% YoY to USD406m, which excludes USD314m from sale of stake in Korean rolling mill to Kobe Steel. Net debt declined by INR672m (~INR44b) YoY to USD3.6b, implying net debt/EBITDA of slightly less than 3x.
- Investing in high-IRR projects: Novelis has doubled its capex to USD450m for FY19 to capitalize on growth opportunities in auto space in the US and China. It will incur another ~USD245m for buying out a finishing line at Sierre, Switzerland. Yet, we believe that net debt will be stable. Novelis' guidance is at 4x ceiling for net debt/EBITDA ratio in case of an acquisition.
- Robust outlook and stable net debt in FY19: We believe Novelis continues leveraging its first-mover advantage in autos. Share of autos increased by 11pp in four years to 20% as of FY18. We expect EBITDA to increase further to USD1.3b in FY20, led by a continued improvement in mix, volume growth and end of margin pressure in BC pricing. Expansion of spreads between metal and scrap prices poses an upside risk.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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