Hindalco Industries Ltd FY2021E earnings would be hit due to aluminum exposure at India business and loss in auto volumes at Novelis.

Chirag Batavia • 4 May 2020

Hindalco Industries Ltd

Beverage can shipments, two-third volume of Novelis, remain intact despite Covid-19 as reassured by major global packaging companies. As beverage can demand is stable in April 2020 with demand being strong in the US, stagnant in Europe and slightly weak in Asia. Investors are concerned regarding Novelis' (70% of HNDL EBITDA) exposure to North America and Europe, the worst-hit geographies by Covid-19. KIE notes that Covid-19 has a major impact only on the auto segment (20% of FY2020E volume mix) of Novelis whereas the beverage can segment (65% of FY2020E volume mix) remains largely unaffected.

Covid-19-led lockdowns in the US and Europe have impacted the auto finishing lines of Novelis along with auto OEMs. For FY2021E, KIE factors a 50% yoy drop in auto volumes with a gradual demand recovery from 2HFY21E. Further, KIE sees near-term headwinds from lower scrap spreads as UBC (used beverage can) discounts have reduced to 31 ¢/lb in April 2020 from +40¢/lb in 3QFY20 due to lower LME prices and limited collection of UBC amid lockdowns.

HNDL's FY2021E earnings would be hit due to aluminum exposure at India business and loss in auto volumes at Novelis.  With Aleris, HNDL's net debt/EBITDA increases to 4.4X in FY2021E. However, with interest coverage of 2.5X, liquidity of +US$3 bn and negligible repayments in FY2021-22E, KIE sees the leverage manageable. KIE notes that HNDL would generate FCF even in FY2021E with yield of 7%. The stock has corrected to 0.5X P/B (ex-goodwill) FY2022E versus historic mean of 1.1X and close to 2008/2015 trough of 0.4X. KIE says it find risk-reward attractive at 4X EV/EBITDA FY2022E versus historic mean of 6.5X and maintain BUY.

Current Market Price of Hindalco Industries Ltd is Rs 130 with a market cap of Rs.292.01 bn. KIE says the fair value of Hindalco Industries Ltd is Rs 225 and has a potential upside of 73.8%

Note: The above is brief note on the company, based on the inputs of KIE research report dated 27th April, 2020 which is available on our website at: https://www.kotaksecurities.com/ksweb/ResearchCall/Fundamental.                   



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