Analysts hopeful for Hindalco despite Novelis' capex revised upwards

In the October-December quarter (Q3) of FY24, Hindalco reported flat consolidated revenue year-on-year (Y-o-Y) at Rs 52,800 crore. Copper revenue rose due to higher shipments and better Average Selling Price (ASP). Revenue from the aluminium vertical and Novelis declined 3 per cent and 6 per cent Y-o-Y, respectively.

Consolidated Ebitda jumped 65 per cent Y-o-Y to Rs 5,900 crore, due to lower input prices. The blended aluminium Ebitda was at Rs 2,500 crore (up 43 per cent Y-o-Y), with an Ebitda margin of 28 per cent-plus. The Ebitda for the copper business was at an all-time high of Rs 656 crore (up 20 per cent Y-o-Y), with higher shipments.

Cost of finance rose 1 per cent Y-o-Y to Rs 940 crore. Depreciation was up 6 per cent Y-o-Y at Rs 1,870 crore in Q3FY24. Adjusted PAT increased 71 per cent Y-o-Y to Rs 2,300 crore, pulled back by high tax outgo, high depreciation, and lower other income.

Novelis maintains Ebitda per tonne guidance at $525 for Q4FY24. But Novelis’ Bay Minette capex is being revised upwards by 65 per cent to $4.1 billion. The commissioning is delayed by a year with the facility likely to be commissioned in H2CY26, and it would take 18-24 months to ramp up to full capacity. The management cited higher civil costs. Return expectations are downgraded to lower double digits (versus mid-teens earlier). This is a key monitorable.

Management guidance was that Hindalco carries 60-90 days of coal inventory. Hence, coal cost will be stable in Q4FY24. The Chakla mine is likely to produce roughly 1 million tonnes (MT) in FY25. Coal availability via linkages improved to 60 per cent (up from 53 per cent). Total input cost for aluminium was down by 3.3 per cent quarter-on-quarter (Q-o-Q) and expected to be stable in Q4FY24. Hindalco achieved over 50 per cent of its RE (renewable energy) target of 300 Mw, with a total of 152 Mw of solar and wind energy, and further 50 Mw of RE capacity expected by Q1FY25.

About 22 per cent of domestic aluminium production is hedged at $2,636 per tonne for Q4FY24. For FY25, Hindalco has hedged 5 per cent in the range of $2,200-2,500 per tonne. The upstream aluminium business saw revenues down 1 per cent Y-o-Y, while Ebitda increased 54 per cent Y-o-Y due to lower input costs. Upstream shipments in Q3FY24 stood at 333,000 tonnes (vs. 336,000 tonnes in Q3FY23), taking estimated yearly shipments to 1.34 MT for FY24. The Ebitda per tonne for upstream stood at $880, and the Ebitda margin came in at 30.7 per cent in Q3FY24, which was among the best globally.

Downstream revenue was down 4 per cent Y-o-Y to Rs 2,500 crore, while Ebitda declined 34 per cent Y-o-Y to Rs 100 crore. This was due to lower realisations. Downstream shipments in Q3FY24 were flat Y-o-Y at 90,000 tonnes, taking estimated yearly shipments for FY24 to 350,000 tonnes. The Ebitda per tonne for downstream business was at $137 (down from $210 in Q3FY23). Combined Ebitda per tonne for the aluminium vertical was $889 (vs. $611 in Q3FY23).

Copper revenue increased 16 per cent Y-o-Y to Rs 12,000 crore, achieving a record Ebitda up 20 per cent Y-o-Y to Rs 656 crore. The copper vertical clocked shipments of 119,000 tonnes (up 9 per cent Y-o-Y) due to better market demand. The Ebitda per tonne for the copper vertical was $653 in Q3FY24.

Globally, aluminium demand remained under pressure, except in the auto sector. The beverage can business (critical for Novelis) is recovering. Domestic aluminium demand is expected to grow 6-7 per cent Y-o-Y. Global copper production and consumption has improved.

Analysts maintained consensus ‘buy’ rating on Hindalco though the stock lost over 12 per cent post Q3 on Tuesday, mainly due to the sharp increase in Novelis’ capex, and ended flat on Wednesday. According to Bloomberg, 15 of the 19 analysts polled post Q3 are bullish; 3 have ‘reduce’ rating and one is ‘neutral’. Their average one-year target price is Rs 573.