The latest rally in aluminum prices has additional lifted earnings outlook for HNDL. Any provide disruptions in bauxite as a result of political points in Guinea can drive price push, which ought to additional profit HNDL because it has captive bauxite. Notwithstanding some close to-time period semis associated dangers for autos, Novelis ought to proceed to learn from structural shift in the direction of aluminum in autos and packaging. We elevate FY22-23e EPS by 7-13% on increased aluminum prices and retain Buy.
Aluminum on a tear: LME aluminum prices have risen 13% in the final month and are up 49% CYTD to $2,950/t, a 13-year-high. The latest political instability in Guinea has raised concern on bauxite availability. Alumina prices have jumped from $426/t at end-Aug to $508/t at spot and will go increased if bauxite provide is impacted. Any bauxite-led price push in aluminum must be helpful for HNDL because the company has 100% captive bauxite in India. HNDL additionally began 0.5-mtpa Utkal alumina refinery in July and has plans to switch the upper price alumina from an older facility; nevertheless, it’s doable it’d promote this alumina in exterior market if prices stay elevated.
Near-term outlook for commodities enhancing: While China inflation spiked and credit score progress slowed once more in August, JEF international commodities group believes we could also be approaching a optimistic inflection level with causes to be optimistic over a 3-6 month horizon.
Novelis on sturdy footing: The downstream Novelis business has been witnessing sturdy demand throughout segments. Notwithstanding some danger to autos as a result of chip shortages, the demand shift in the direction of SUVs, choose-up vans and EVs is boosting demand for aluminum. The can section is benefiting from shift in packaging from plastics and glass. Novelis’ money flows are prone to be below slight strain although as a result of increased working capital requirement amid rising aluminum prices.
Earnings improve: We elevate our FY22-23 aluminum value assumptions by 9-11% to $2550-2600/t (nonetheless 12% under spot). This outcomes in FY22-23e Ebitda improve of 5-8% and EPS rising by 7-13%. Our FY22-23e EPS are 4-12% above road. External sale of incremental alumina from Utkal can add additional ~3% to Ebitda and ~5% to EPS. Despite increased working capital want, we see web debt falling by Rs 14/30 per share in FY22/FY23.
FY23E PB of 1.2x is cheap for 15% ROE: Stock has outperformed Nifty by ~75% CYTD however its 1.2x FY23e PB appears cheap for 15% ROE in FY23e; the stock peaked at 1.7x PB in 2010-11 for related ROE. We elevate our TP to Rs 610 primarily based on FY23e EV/Ebitda of 5.5x for India and seven.0x for Novelis; our value goal implies 1.6x FY23e PB.