Hindalco on good wicket, stock could rise up to 20%

ET Intelligence Group: Hindalco shares jumped 12% after it surprised the Street by posting strong March quarter numbers, driven primarily by its aluminium business, which gained from higher volumes and lower energy costs. FY17 is expected to be supportive of its performance as most of the company’s capacity expansion is done and it will become free-cash flow positive, after several years.

After the results, most analysts have given aggressive buy recommendation on the stock. But concerns such as weak fundamentals for aluminium and weak Chinese demand remain.

Hindalco’s Indian business’ standalone EBIT, after adjusting for other income was Rs 621 crore against Rs 113.5 crore in the preceding quarter. This strong performance was entirely led by aluminium business which saw its EBIT grow to Rs 520 crore — thanks to high volumes, up by 13%, and lower coal and fuel oil costs.

There were also some hedging gains — aluminium hedged at higher price which boosted the profitability.

Hindalco’s US subsidiary, Novelis also reported strong numbers earlier this month — over 30% jump in EBIT.

The company’s consolidated EBIDTA for FY16 was Rs 8,740 crore. Assuming a 20% EBIDTA growth for the next year and giving Hindalco an EV/EBIDTA multiple of 6.5, the higher range of last five years’ multiples, the stock has potential for another 20% upside.

However, any correction in the aluminium prices would be a concern. After correcting 10% from its peak, over the past few weeks, LME aluminium prices have stabilised at $1530/unit.

Hindalco’s consolidated debt for FY16 was Rs 55,500 crore, marginally lower than the previous year. Going forward, deleveraging will remain the focus. Overall, Hindalco remains a strong turnaround and a deleveraging play.