Well-placed. HNDL has corrected by 13% in the previous two months and we discover it attractively placed amid sturdy aluminum fundamentals and robust demand in the FRP segment at Novelis. India small business must see margin expansion from elevated aluminum costs in spite of price inflation. At Novelis, sturdy demand, record scrap spreads and ramp-up in auto volumes produce upside dangers to management margin guidance. The stock at 5X EV/EBITDA FY2023E presents desirable danger-reward. Get with FV of Rs 500.
Novelis – robust margins in spite of semiconductor difficulties most likely to outperform margin guidance: Novelis has shown sturdy resilience with US$525/ton EBITDA in 2HFY21 following Covid hit in 1HFY21. We anticipate only a marginal volume influence in its auto segment in 1HFY22E from the ongoing semiconductor shortage as auto OEMs have prioritized aluminum-intensive cars. We anticipate Novelis to provide at the upper finish of its margin guidance in 1HFY22E ($500/ton) and see a possible expansion by $40-50/ton in 2HFY22E led by (1) the beverage can segment – tailwinds from a deficit market place and greater margins on renewed contracts, (2) scrap spreads are at record higher offered sturdy LME, physical premiums and higher UBC recovery prices in most markets, and (3) ramp-up of lately commissioned auto lines in North America and China.
Indian aluminum – sturdy costs to more than offset price pressures: HNDL’s domestic aluminum division must see 3-5% sequential price inflation in 1HFY22E led by greater coal and carbon expenses. Strong metal costs must elevate aluminum EBITDA to $814/ton, +55% yoy, in FY2022E notwithstanding greater expenses and low price tag hedges. The Utkal refinery is on track to commission in 2QFY22E and must help in margins.
Deleveraging to continue and earnings have upside danger, reiterate Get with Fair Value of Rs 500: HNDL’s leverage peaked in 1QFY21 and we anticipate deleveraging to continue with sturdy earnings and measured capex. Reiterate Get on desirable valuations – 5X EV/EBITDA FY2023E with unchanged FV of Rs 500/share at 6.3X EV/EBITDA March 2023E.