Hindalco gains 5% after unit Novelis' Q4 results; brokerages maintain 'buy'

Novelis informed that its net income attributable to its common shareholder came in at $63 million for the quarter under review, down 39 per cent year-on-year (YoY

Shares of Hindalco Industries climbed over 5 per cent to Rs 123.65 apiece in the intra-day deals on the BSE on Friday, a day after its subsidiary Novelis reported better-than-expected results for the quarter ended March 2020 (Q4FY20).

At 11:22 am, the stock was trading 2.68 per cent higher at Rs 120.70 apiece on the BSE as compared to 1.66 per cent rise in the benchmark S&P BSE Sensex.

In its press release, Novelis informed that its net income (profit) attributable to its common shareholder came in at $63 million for the quarter under review, down 39 per cent year-on-year (YoY), and $420 million for the full year, down three per cent from fiscal 2019. Excluding tax-effected special items in both years, the company grew its fourth quarter fiscal 2020 net income by 18 per cent to $153 million, and its full year net income by 26 per cent to $590 million. The increase for both the quarter and year is primarily due to higher adjusted EBITDA and lower interest expense, the company said. 

The current quarter includes a cumulative positive impact of $29 million from a contractual customer obligation pertaining to the full fiscal year. Other favorable drivers for the year-over-year improvement include lower metal and other operating costs, lower SG&A, and favorable foreign exchange, mostly offset by lower shipments, it added.

Net sales, however, decreased twelve per cent from the prior year period to $2.7 billion for the fourth quarter, driven by lower average LME aluminum prices and local market premiums, and a seven per cent decline in shipments.

Adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) increased 7 per cent to $383 million as compared to $357 million in the year-ago period. 

"Our strategy to invest in our operations and our people has delivered four consecutive years of record financial results and an exceptionally strong balance sheet. It is this solid foundation, coupled with an unwavering commitment to our purpose of shaping a sustainable world together, that will help us safely and successfully navigate the challenges posed by the novel coronavirus and extend our leadership position in the aluminum industry," said Steve Fisher, President and CEO, Novelis Inc. 

Adding, "In addition, with the acquisition of Aleris now complete, I am more confident than ever that our diverse product portfolio, global footprint, deep customer relationships, reliable assets, and disciplined investments will deliver even more value to our customers and shareholder moving forward."

What brokerages say?

Novelis consistently delivered across the parameters with consistent earnings growth (10% EBITDA CAGR over FY15-FY20), balanced product basket and strong B/S (Net debt/EBITDA at 2.1x). Admittedly, Aleris would face significant headwinds in FY21e due to its exposure to Aerospace and building and construction segments. However, niche product basket and higher infra spending in US would revive earnings in FY22e, notes Prabhudas Lilladher. 

"In the wake of attractive valuations, comfortable B/S and better earnings outlook, we reiterate BUY on Hindalco with TP of Rs 170, EV/EBITDA of 5.7x FY21e," the brokerage added. 

Analysts at Motilal Oswal Financial Services (MOFSL), too, remain positive on the stock. "We have factored in EBITDA of USD210m/USD250m from Aleris’ operations and earnings of Lewis Port under continued operations due to lack of clarity on its profitability. With ~75% EBITDA contribution from non-LME business i.e. conversion business (Novelis + Aleris), we see lesser volatility in Hindalco’s earnings. The stock trades at an attractive valuation of 5.0x EV/EBITDA and 6x P/E on FY22E. We value it at Rs 179/share based on SOTP," the brokerage says. It has maintained "Buy" rating on the stock. 

ICICI Securities notes that with a $1billion base case EBITDA and a net debt of US$5.6bn- 5.7bn, FY21E ‘Net Debt/EBITDA’ may look elevated. This embodies an opportunity as systemic stress allows Hindalco P/B to be at 0.35x FY22E. While consensus downgrades will be seen for the rest of the year, the CMP more than adequately discounts the same. 

It maintains "BUY" with an unchanged target price of Rs 199/share.