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Target: ₹502
CMP: ₹460.25
Hindalco Industries operates under three segments — low-cost vertically integrated Aluminium segment (1.3mt), world’s largest rolling and recycling Novelis operations (4mt rolling and 2.5mt recycling facility) and custom copper smelting (0.42mt copper cathodes capacity).
Aluminium cost of production increased 20 per cent q-o-q in Q2-FY23 due to higher energy costs. The management expects ease in coal prices and supply and has guided on a 2-5 per cent reduction in production costs in Q3-FY23.
Novelis’ long-term sustainable EBITDA/tonne guidance unchanged at $525/tonne. However, for H2-FY23, citing higher energy/logistics costs, the company guided near-term cost headwinds of $75-125/tonne on EBITDA/tonne from the $525/tonne level. However, we expect the EBITDA/tonne to inch up to $525/tonne at Novelis from FY23-end as price contracts get reset, ensuring pass-through of higher costs. Novelis is also hedged for about 80 per cent of its energy costs for the remaining of FY23 and above 60 per cent for FY24.
The supply of copper concentrate is expected to increase with the onset of new mines. On account of better TC/RC margin, copper EBITDA is expected to sustain in the range of ₹450-500 crore.
We believe Hindalco to be a defensive play backed by stable cash flows and lower operational and financial leverage.
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