Hindalco Share price today: ICICI Securities maintains HOLD rating on Hindalco Industries with target price of Rs 270

Hindalco Share price price today: Novelis Q3 FY21 EBITDA surprised with adjusted EBITDA of US $537 against expected US$485. Part of the beat has been on account of US $25 mn favourable gain on customer contractual obligation in Europe (one-off). Further, buoyancy in South American operations where EBITDA expanded US $17 mn QoQ helped. These largely explain the EBITDA increase QoQ and 70% of the EBITDA beat. Aleris EBITDA at US $50 mn is flat QoQ (US $47 mn in Q2 FY21). Management highlighted that they are keenly watching the developing scrap tightness as Chinese imports pick up.

Novelis Management is yet to indicate any change in EBITDA guidance. The impending weakness can reduce US$50-60 from EBITDA (ICICI Securities estimate) given where the scrap-LME spreads were prior to the start of the US-China trade war. ICICI Securities maintain HOLD rating on Hindalco Industries with target price of Rs 270.

Deleveraging continues; Net debt to EBITDA will settle below 3x:

Novelis Management guided for Net Debt to EBITDA to settle much lower than previously guided 3x given the pace of deleveraging and capital allocation plans on the horizon. Capex for FY21E will be US $450-500 mn and FCF for 9M FY21 is US $205 mn. Engineering study is underway for China cold mill investment with a probable budget of US $300 mn. No major hot mill investments have been planned yet.

Tightening scrap LME spreads and the possible impact on EBITDA:

Novelis Management stated that they need to watch the evolving scenario on the possible scrap market tightness (compression of Scrap LME spread) and its impact on EBITDA margins. EBITDA guidance stays at US $470-500.

The tightness in the scrap market, as per management is due to:

i) increase procurement from China
ii) logistical challenges currently been seen across the globe

ICICI Securities believes that a tightening scrap LME spread can reduce EBITDA/te significantly and remains the key risks to medium term margin trajectory.

Maintain HOLD on Hindalco:

The end market outlook is on the mend, with increasing tailwinds in auto (driven by sustainability – EV and light weighting trend), beverage cans which contribute 51% of portfolio and continues to see a shift from glass/plastic to cans.

The key evolving trends that need a look out are:

i) increasing capacity of beverage can sheets across end markets
ii) initial trends of weakening nonresidential construction in North America
iii) weakening scrap LME spreads