3Q recurring PAT was up 2% QoQ (+68% YoY). Net debt fell 9% QoQ to Rs 43,700 crore.
Key takeaway: HNDL’s 3Q EBITDA rose 42% YoY (down 4% QoQ), and came 10% above JEFe led by strong India performance. Novelis was upbeat on demand and maintained its margin guidance of ~$500/t; India business is also benefiting from rising aluminum prices.
HNDL is shifting gears from deleveraging to growth and is evaluating a brownfield aluminum smelter expansion in India, which might raise some concerns on capital allocation. We upgrade FY22-24E EPS by 5-7% and retain ‘Buy’.
Good 3Q results: HNDL’s 3Q EBITDA at Rs 7,400 crore was up 42% YoY (down 4% QoQ) and 10% above JEFe led by better-than-expected India business performance. India aluminum volume was down 4% QoQ but EBITDA rose 4% QoQ; copper volume was also flat QoQ but EBITDA rose 11% QoQ. Novelis’ 3Q EBITDA rose 6% YoY (down 8% QoQ) and came in line with JEFe (Report). Its shipments fell 4% QoQ while EBITDA/t was down 5% QoQ to $544. 3Q recurring PAT was up 2% QoQ (+68% YoY). Net debt fell 9% QoQ to Rs 43,700 crore.
Good outlook for Novelis: Novelis, c.55% of HNDL’s EBITDA, continues to see strong underlying demand across beverage can, auto and specialty segments. Ramp up of new facilities should raise share of higher-margin autos in shipments from 16% to 25% over 2-3 years. Novelis’ EBITDA/t has expanded from ~$300 in FY14-16 to $450 in FY20 and $546 in 9MFY22, and the strong demand outlook across key segments is a positive for profitability. While a drop in beverage can scrap spread could pose some margin pressures, Novelis is confident of sustaining EBITDA/t around $500.
Beneficiary of rising aluminum prices: LME aluminum price is up 16% CYTD to $3,248, 18% above Dec-Q average, led by a renewed rally in energy costs and geopolitical concerns in Eastern Europe. HNDL’s aluminum production cost rose ~8% QoQ in 3Q and it expects further ~10% rise in 4Q due to higher coal cost.
However, higher aluminum prices should help offset part of the impact. Our estimates for 4QFY22/FY23 factor in aluminum price of $2,916/$2,700 (10%/17% below spot) and EBITDA/t (including alumina EBITDA) of $1,275/$1,337 versus $1,386 in 3Q and $400-600 in FY17-21.
Shifting gears from deleveraging to growth: HNDL said that it is now shifting its focus from deleveraging to organic growth. It is evaluating setting up a brownfield aluminum smelter in India, although this is a lower priority than downstream and alumina expansions. HNDL has turned more optimistic on the aluminum price outlook amid strong demand drivers such as EVs and packaging, and limited capacity additions. Energy sourcing is a key consideration given the impact on emissions, and HNDL added that it already has an offer for ~85% renewable energy.
Retain Buy: HNDL’s 1.4x FY23E PB is reasonable for 16% FY23E ROE and low earnings risk at Novelis. It has historically traded at average 0.8x PB for 9% ROE. We upgrade FY22-24 EPS by 5-7% factoring slightly higher aluminum prices. We retain ‘Buy’ with `660 PT based on 7x Sep-23E EV/EBITDA for Novelis and 5x Sep-23E EV/EBITDA for India. Our PT implies 1.6x FY23E PB.
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