The current rally in aluminum costs has additional lifted earnings outlook for HNDL. Any provide disruptions in bauxite resulting from political points in Guinea can drive price push, which ought to additional profit HNDL because it has captive bauxite. However some near-term semis associated dangers for autos, Novelis ought to proceed to learn from structural shift in direction of aluminum in autos and packaging. We increase FY22-23e EPS by 7-13% on greater aluminum costs and retain Purchase.
Aluminum on a tear: LME aluminum costs have risen 13% within the final month and are up 49% CYTD to $2,950/t, a 13-year-high. The current political instability in Guinea has raised concern on bauxite availability. Alumina costs have jumped from $426/t at end-Aug to $508/t at spot and will go greater if bauxite provide is impacted. Any bauxite-led price push in aluminum needs to be helpful for HNDL as the corporate has 100% captive bauxite in India. HNDL additionally began 0.5-mtpa Utkal alumina refinery in July and has plans to switch the upper price alumina from an older facility; nonetheless, it’s attainable it would promote this alumina in exterior market if costs stay elevated.
Close to-term outlook for commodities enhancing: Whereas China inflation spiked and credit score progress slowed once more in August, JEF international commodities group believes we could also be approaching a optimistic inflection level with causes to be optimistic over a 3-6 month horizon.
Novelis on robust footing: The downstream Novelis enterprise has been witnessing robust demand throughout segments. However some threat to autos resulting from chip shortages, the demand shift in direction of SUVs, pick-up vehicles and EVs is boosting demand for aluminum. The can section is benefiting from shift in packaging from plastics and glass. Novelis’ money flows are more likely to be underneath slight stress although resulting from greater working capital requirement amid rising aluminum costs.
Earnings improve: We increase our FY22-23 aluminum value assumptions by Sep 11% to $2550-2600/t (nonetheless 12% under spot). This leads to FY22-23e Ebitda improve of 5-8% and EPS rising by 7-13%. Our FY22-23e EPS are 4-12% above avenue. Exterior sale of incremental alumina from Utkal can add additional ~3% to Ebitda and ~5% to EPS. Regardless of greater working capital want, we see web debt falling by Rs 14/30 per share in FY22/FY23.
FY23E PB of 1.2x is affordable for 15% ROE: Inventory has outperformed Nifty by ~75% CYTD however its 1.2x FY23e PB seems affordable for 15% ROE in FY23e; the inventory peaked at 1.7x PB in 2010-11 for related ROE. We increase our TP to Rs 610 primarily based on FY23e EV/Ebitda of 5.5x for India and seven.0x for Novelis; our value goal implies 1.6x FY23e PB.
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