Target: ₹473
CMP: ₹322.4
Hindalco s share price has fallen nearly 50 per cent from its peak of March 2022 with investors having concern on its huge capex plans coinciding with falling aluminum prices and possibilities of earnings hit of Novelis amid recessionary fear in developed economies like US and Europe.
We believe that the stock has factored in pessimism and market failed to single out the companies like HNDL whose earnings are relatively less susceptible to commodity prices and about 60 per cent of EBITDA comes from conversion business which is intact.
We believe that fundamentals of aluminum are robust and there should not be any major fall from current price of $2,500/t. However, with China increasing exports, global deficit may reduce and accordingly, we cut our average LME aluminium prices to $2,600/t in FY23 and $2,400/t in FY24, leading to 3 per cent/6 per cent cut in FY23/FY24 EBITDA.
With earnings cut and lower valuation multiple, we reduce our target price to ₹473 (earlier ₹573), valuing Novelis at 6.0x FY24E EV/EBITDA and Indian operations at 4.0x FY24E EV/EBITDA. At CMP, the stock is trading at 4.0x FY24E EV/EBITDA, which is near to a decade low.