Buy Hindalco Industries, target Rs 307: Edelweiss Financial Services

Edelweiss Financial Services has a buy call on Hindalco Industries with a target price of Rs 307.

The current market price of Hindalco Industries is Rs 235.95.

Time period given by the brokerage is one year when Hindalco Industries price can reach the defined target.


View of the brokerage on the company:
At the cusp of transformation: The acquisition of Aleris at an attractive valuation (7.2x FY21E EBITDA) is an important milestone in HNDL’s journey—overseas downstream operations’ foothold in the aerospace segment would complement its global leadership in the auto segment. Besides, HNDL’s earnings would get increasingly independent of LME volatility due to Novelis and Aleris. Management believes that it might take almost two years to integrate Aleris, implying HNDL will be in a consolidation phase until then.

Robust model- EBITDA stability and balance sheet strength: We are positive on the stock as: 1) more than 70 per cent of consolidated EBITDA is expected to be LME-neutral; 2) VAP would drive domestic business’s incremental growth; and 3) net debt/EBITDA to be maintained less than 3x post-Aleris consolidation in two years.

Outlook and Valuation- Trumping macro concerns; Maintain ‘BUY’: We are upbeat on the HNDL stock in light of management’s focus on downstream products and the increasingly neutral earnings impact to LME cyclicality. On revised USD:rupee estimates, our FY19E/FY20E EBITDA has risen 13 per cent each while we trim the domestic multiple to 6.5x (from 6.8x) as we expect an unfavourable macro environment to suppress valuations. Maintain BUY with revised target price of Rs 307, implying exit multiple of 6.6x FY20E EBITDA.