The current rally in aluminum rates has additional lifted earnings outlook for HNDL. Any provide disruptions in bauxite due to political troubles in Guinea can drive expense push, which must additional advantage HNDL as it has captive bauxite. Notwithstanding some close to-term semis connected dangers for autos, Novelis must continue to advantage from structural shift towards aluminum in autos and packaging. We raise FY22-23e EPS by 7-13% on greater aluminum rates and retain Buy.
Aluminum on a tear: LME aluminum rates have risen 13% in the last month and are up 49% CYTD to $2,950/t, a 13-year-higher. The current political instability in Guinea has raised concern on bauxite availability. Alumina rates have jumped from $426/t at finish-Aug to $508/t at spot and could go greater if bauxite provide is impacted. Any bauxite-led expense push in aluminum must be valuable for HNDL as the business has one hundred% captive bauxite in India. HNDL also began .5-mtpa Utkal alumina refinery in July and has plans to replace the greater expense alumina from an older facility nonetheless, it is achievable it could sell this alumina in external marketplace if rates stay elevated.
Near-term outlook for commodities enhancing: While China inflation spiked and credit development slowed once more in August, JEF international commodities group believes we may possibly be approaching a positive inflection point with factors to be optimistic more than a 3-6 month horizon.
Novelis on robust footing: The downstream Novelis company has been witnessing robust demand across segments. Notwithstanding some danger to autos due to chip shortages, the demand shift towards SUVs, choose-up trucks and EVs is boosting demand for aluminum. The can segment is benefiting from shift in packaging from plastics and glass. Novelis’ money flows are probably to be below slight stress although due to greater working capital requirement amid increasing aluminum rates.
Earnings upgrade: We raise our FY22-23 aluminum cost assumptions by 9-11% to $2550-2600/t (nonetheless 12% beneath spot). This benefits in FY22-23e Ebitda upgrade of 5-8% and EPS increasing by 7-13%. Our FY22-23e EPS are 4-12% above street. External sale of incremental alumina from Utkal can add additional ~3% to Ebitda and ~5% to EPS. Despite greater working capital require, we see net debt falling by Rs 14/30 per share in FY22/FY23.
FY23E PB of 1.2x is affordable for 15% ROE: Stock has outperformed Nifty by ~75% CYTD but its 1.2x FY23e PB appears affordable for 15% ROE in FY23e the stock peaked at 1.7x PB in 2010-11 for equivalent ROE. We raise our TP to Rs 610 based on FY23e EV/Ebitda of 5.5x for India and 7.0x for Novelis our cost target implies 1.6x FY23e PB.