CLSA reiterates buy rating on Hindalco, Novelis reports robust Q2 results

CLSA reiterates Buy rating on Hindalco, lifts their target price to Rs 270 from Rs 225 partly offset by lower consideration from the sale of assets. Novelis reports robust Q2 results; realisation from divestment disappoints Novelis (100% sub of Hindalco) reported Q2 underlying EBITDA of U.S. $443 mn (+39% vs CLSA) on strong profitability (U.S. $493/T) and higher volumes (+11% YoY). Ex Aleris, erstwhile Novelis volumes were down 3% YoY (peer Constellium -10% YoY), while was at U.S. $494/T. Novelis meaningfully raised its medium-term profitability guidance to U.S. $480-500/T. The key disappointment from the results was a much lower realisation from divestment of auto facilities.

Q2 EBITDA surprise across parameters:

Novelis reported Q2 underlying EBITDA of U.S. $443 mn (+39% vs CLSA expectations) driven by strong profitability (U.S. $493/T) and higher volumes (+11% YoY). Erstwhile Novelis (ex Aleris) volumes were down 3% YoY, while CLSA’s estimated profitability at U.S. $494/T. Profitability at Aleris was at U.S. $482/T. One-offs due to impairment in discontinued operations led to PAT loss (U.S. $37 mn). PAT from continuing operations was at U.S. $144 mn.

Significant uplift in guidance:

Novelis lifted its margin guidance meaningfully from U.S. $450-475/T earlier to U.S. $480-500/T now. It mentioned that the steady state profitability of the erstwhile Novelis business is also likely to be sustainably above the U.S. $430-450/T guided earlier. In terms of capacity, it expects to reach 4.5 mt over the medium term. On synergies from Aleris acquisition, it has revised its guidance up from U.S. $150 mn to U.S. $185 mn, of which U.S. $38 mn has already started to accrue. In terms of products, it expects beverages can show 3-5% CAGR over 2020-25, while auto sheet demand to exhibit 10% CAGR (post near-term volatility).

Realisation from divestment of auto facilities much lower than expectations:

The key disappointment in the call was the agreed consideration from sale of the Lewisport facility at EV of U.S. $330 mn (vs street expectation of U.S. $500-700 mn). Earlier, it had entered into arbitration for lower consideration from the Duffel facility sale. Both these are primarily autosheet facilities, acquired as part of Aleris.

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Resilient earnings and attractive valuations; reiterate BUY

The results underscore CLSA’s thesis on resilience of Novelis’ earnings and growth outlook across segments while sale consideration of auto facilities is a disappointment, CLSA thinks it is more than offset by strong operational performance. CLSA raised the EBITDA forecast by 8-12% on better earnings going forward.