Buy Hindalco Industries, target Rs 322: Motilal Oswal Securities

Motilal Oswal Securities has a buy call on Hindalco Industries with a target price of Rs 322.

The current market price of Hindalco Industries is Rs 237.75.

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


Investment rationale by Motilal Oswal Securities:
Revenue increased 15 per cent in FY18, driven by 2-8 per cent volume growth across segments and a 21 per cent increase in LME prices. Indian aluminum smelters witnessed a revenue loss of USD74/t due to hedging. Product premiums have stabilized, indicating there is no incremental pricing pressure in the Indian aluminum space.

Cost of production (CoP) for aluminum smelters increased by USD224/t (Exhibit 4), largely driven by a rise in raw material cost and wage hikes. CoP of alumina at Utkal increased by USD16 to USD186/t, which is still most competitive in the world. Conversion cost for copper smelters was stable at USc21.6/lb.

EBITDA increased 11 per cent to Rs 138b (Exhibit 7), nearly 71 per cent of which is insulated from volatility in LME (Exhibit 8). Novelis’ EBITDA grew 8 per cent, equally driven by expansion in margins and volumes. Benefiting from coal and bauxite mining integration, aluminum EBITDA increased 20 per cent, despite a hedging loss and an increase in CoP as LME prices increased 21 per cent.

Interest cost declined sharply by 32 per cent to Rs 39b, led by (a) full benefit of annual savings of USD79m on refinancing of USD4.3b at Novelis in FY17 and (b) pre-repayment of debt in India. HNDL reduced its gross debt by Rs 123b (including prepayment of Rs 79.7b) during the year. Adjusted PAT increased 121 per cent to Rs 42b.

Rs 6.7b was provided in wage cost toward various future benefits. Total unfunded defined benefit obligation (DBO) remained unchanged at Rs 59b. MTM value of quoted equity investments is Rs 65b.

Book value increased more than EPS on fair value gains of Rs 30b.

Cash flow from operations (CFO) before working capital (WC) changes increased 6 per cent to Rs 127b. WC increased by Rs 18b due to a marginal increase in the cash conversion cycle and growth in both prices and volumes.

Free cash flows (FCF) increased 59 per cent to Rs 73b, while net debt declined by Rs 65b to Rs 400b. Return ratios are trending up. RoCE (pre-tax) improved 110bp to 9.3 per cent, which we believe will increase to 10.4 per cent in FY20, even after integrating the leveraged acquisition of Aleris.

We expect EBITDA and EPS CAGR of 15 per cent and 20 per cent, respectively, over FY18-20, driven by growth at Novelis and the acquisition of Aleris. Higher LME and Rs depreciation will benefit the Indian business. By FY20, RoE is expected to improve by another 70bp to 13.5 per cent, while RoCE (pre-tax) is expected to increase by 110bp to 10.4 per cent.

HNDL has a very strong balance sheet, with a net debt-to-EBITDA ratio of 2.9x. Management’s focus has now shifted toward growth in the downstream business. The stock is trading attractively at EV/EBITDA of 5.9x FY20E. We value the stock at Rs 322, based on 6.5x EV/EBITDA and book value for CWIP.