Hindalco Share price: ICICI Securities looks ahead in FY22/23E and see limited earnings tailwind for Novelis (vs expectations). ICICI Securities maintain HOLD rating with a target of Rs 417. Novelis as an earnings trigger is largely exhausted in ICICI Securities view, allowing the LME induced volatilities to drive share price performance from here on.

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Novelis reported an inline adjusted EBITDA of US $505 mn in Q4FY21 (EBITDA/te of US $514). Novelis was categorical in playing down the EBITDA impact from a halt in auto production due to chip shortage  and can maintain US $500/te of EBITDA in Q1FY22E. Aleris continues to benefit from the constructive building and construction markets.

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For the last couple of years, Novelis was instrumental in providing a steady tailwind to Hindalco’s EBITDA as:

i) Scrap LME spreads expanded
ii) Aleris acquisition coincided with specialties taking support of a strong building and construction markets as well as higher scrap LME spread
iii) Latin American spreads rebased to US$800/te+

With most of the volume and margin upsides, from Novelis, in the estimates, the story of Hindalco will pivot back to LME and its volatilities. ICICI Securities maintains HOLD with a revised target of Rs 417 (Rs 270 earlier).

Novelis continues to execute on the organic growth projects, thereby continuing on its journey to reach 1mtpa of automotive aluminium sheet across North America, Europe and China (Q4FY21 portfolio mix was 19%, will gradually move up to 22-23%). This includes 200kte of greenfield expansion in Kentucky, US and 100kte brownfield expansion in Changzhou, China. Brazil recycling expansion to commission by end of Q1FY22, while rolling capacity upgrades will end by FY22. Also, Novelis has been able to achieve US$79mn of run-rate combination synergies with Aleris through FY21. Groundbreaking for new US $325-375mn cold mill in Zhenjiang, China is expected in mid-FY22 and will help capture US $65 mn of additional synergies, says ICICI Securities

Maintain adequate liquidity and repatriate cash to Hindalco:

What the debt reduction target for FY22E highlights is US $700 mn of FCF, similar to FY21E. Management has adjusted for higher capex (higher US $165 mn YoY) and higher working capital requirements. As highlighted in the capital markets day earlier, 8- 10% of FCF before growth capex will be repatriated to Hindalco (US $100 mn p.a).