Hindalco investors can expect more gains in second half: Analysts

Rebounding aluminium, copper prices to drive earnings

With Hindalco’s US subsidiary Novelis reporting record profitability, the firm’s strong all-round domestic performance too impressed the Street. 

The operating performance was good despite consolidated net profit falling 60 per cent year-on-year (YoY), mainly due to one-offs. Significant rebound in the aluminium and copper segments’ profitability helped by better product mix, demand improvement and rising metal prices point towards a better second half for Hindalco. The improving per tonne profits and guidance will drive earnings.

The aluminium segment’s 25 per cent sequential growth in Ebitda outpaced revenue growth of 8 per cent. While aluminium prices on the London Metal Exchange (LME) recovered 14 per cent sequentially to an average $1,704 a tonne, stable costs and better product mix helped. Although aluminium metal sales volume at 303,000 tonnes in Q2 were flat sequentially and lower than 315,000 tonnes estimated by analysts, it was well compensated by the 81 per cent sequential increase in value-added products (VAP) sales. Contribution of aluminium VAP increased to 21 per cent from 11 per cent in Q1, and improved profitability.

Rising aluminium prices, which are currently close to $1,900, point towards a much better outlook though production costs may rise slightly (with rising coal prices) and get reflected from Q4. LME copper prices are also improving. Currently, copper is at $7,034 a tonne, up 12 per cent sequentially from an average of $6,517.

The copper segment is also supporting Hindalco’s performance with rebounding demand leading to copper cathode sales improving 76 per cent and rod volumes more than doubling sequentially. 

The record fertilizer sales helped by robust demand due to good monsoon was another highlight. DAP volumes were up 25 per cent sequentially and more than doubled YoY in Q2. Copper segment’s Ebitda grew fourfold, outpacing revenue growth of 58 per cent sequentially.

Novelis, which now contributes over 70 per cent to consolidated operating profit, remains on a firm wicket. Being a convertor of raw aluminium to VAPs, it is insulated from aluminium prices movement. Novelis increased its free cash flow forecast to FY20 levels ($384 million) and sustainable Ebitda per tonne to $480-500 from earlier guidance of $450-475, which is encouraging, says Credit Suisse. Novelis had reported record Ebitda per tonne of $493, beating most analyst estimates in Q2. The possible synergy benefits from Aleris acquisition has been increased to $180 million from $150 million earlier even as it has had to divest Lewisport assets, is positive.

Overall, analysts are bullish and see more gains for Hindalco. Credit Suisse has maintained ‘outperform’ with target price of Rs 240, while Motilal Oswal Securities’ target price is Rs 267.