Pick of the week: Brokerage recommends buying in this metal stock. Key triggers
3 min read 19 Dec 2022, 03:33 PM ISTThe stock brokerage suggested buying Hindalco shares on the back of the company's cost peaking in Indian aluminium, low earnings risks in subsidiary Novelis and disciplined capital allocation by the management.
PremiumHindalco Industries is the pick of the week by Axis Securities. Hindalco stock begins the week on a volatile note, however, has gained by at least 1% on Monday. The stock brokerage suggested buying Hindalco shares on the back of the company's cost peaking in Indian aluminum, low earnings risks in subsidiary Novelis and disciplined capital allocation by the management. The stock has skyrocketed by more than 44% in six months on Dalal Street.
At the time of writing, on BSE, Hindalco shares traded at ₹460.15 apiece up by 0.41%. The stock has climbed by 1.03% with an intraday high of ₹463 apiece. Its market cap is over ₹1.03 lakh crore.
In a month, Hindalco has surged by at least 7.6%. However, in six months period, the stock has rallied 44.32% on BSE.
Hindalco is the metals flagship company of the Aditya Birla Group. A $26 billion metals powerhouse, Hindalco is the world’s largest aluminum company by revenue and a major player in copper. Also, the company is one of Asia’s largest producers of primary aluminum.
In its pick of the week report, Axis Securities said, "We believe Hindalco to be a defensive play backed by stable cash flows and lower operational and financial leverage. Hindalco’s Net Debt/EBITDA is at 1.47x well below the target of 2.0x. LME Aluminium is expected to find support from peaking of the US dollar and China easing its Zero Covid policy."
Further, Axis Securities explained the investment rationales for Hindalco shares. These are:
1. Costs peaking out at Indian Aluminium operations:
Aluminium CoP surged by 20% quarter-on-quarter in Q2FY23 due to higher energy costs. In the first half of FY23, the company's management expects to ease in coal prices and supply, while planning a 2-5% reduction in CoP during Q3FY23. Further reduction in Q4FY23 is possible.
2. Novelis’ EBITDA (~+50% Group’s EBITDA) is almost de-risked from the LME Aluminum volatility:
Novelis’s long-term sustainable EBITDA/t guidance is kept unchanged at $525/t. However, for H2FY23, citing higher energy/logistics costs, the company guided the near-term cost headwinds of $75-125/t on EBITDA/t from the $525/t level.
However, the brokerage expects the company's EBITDA/t to inch up to $525/t at Novelis from the end of FY23 onwards as price contracts get reset, ensuring pass-through of higher costs. Also, Novelis is hedged for about 80% of its energy costs for the remaining of FY23 and above 60% for FY24. 60% of Novelis' business is from recession-resilient beverage cans.
3. Sustainable EBITDA from the copper conversion on improved Tc/Rc:
The supply of copper concentrate is expected to increase with the onset of new mines. As a result, spot Tc/Rc is expected to remain elevated in H2FY23. Spot TC/RC has risen to USc21.5/lb from USc18.5/lb QoQ. On account of better Tc/Rc margin, copper EBITDA is expected to sustain in the range of ₹450-500 crore (quarterly run rate. Q2FY23: ₹544 crore).
4. Disciplined capital allocation approach:
Hindalco's management stated that they will pace the growth Capex with the cash flows to keep Net-debt/EBITDA within 2.5x at Novelis, whereas in India gross debt should not exceed the current level of ₹14,000 crore.
Following the above, Axis Securities recommended a BUY rating on Hindalco stock with a target price of ₹502 per share.
In Q2FY23, Hindalco garnered a consolidated revenue of ₹56,176 crore rising by 18% YoY, driven by higher volumes and better realisations. Hindalco maintained its strong operational performance across all businesses. The company's copper business and aluminium downstream reported year-on-year growth in EBITDA of 55% and 163% respectively, driven by better pricing and recovery in domestic demand.
However, in Q2FY23, the company's consolidated net profit dipped by 35% YoY to ₹2,205 crore due to elevated input costs and inflationary impacts.
Its subsidiary Novelis delivered a solid second quarter despite challenging headwinds with revenue at $4.8 billion in Q2 FY23, an increase of 17% YoY, due to recovery in demand of automotive and aerospace segments, higher pricing, and favourable product mix. Novelis continued to report a quarterly EBITDA of over $500 million ($506 million in Q2 FY23, down 8% YoY), as per the filing.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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