Hindalco Industries Ltd

Metal - Non Ferrous

Hindalco Industries Ltd

Metal - Non Ferrous

Large Cap Focus Portfolio

CMP
Rs. 333.80
Target
Rs. 410
Rating:
Buy
March 15, 2021

Stock Info

BSE
500440
NSE
HINDALCO
Bloomberg
HNDL:IN
Reuters
HALC.NS
Sector
Metal - Non Ferrous
Face Value (Rs)
1
Equity Capital (Rs cr)
222
Mkt Cap (Rs cr)
74949.39
52w H/L (Rs)
361.30 - 84.90
Avg Daily Vol (BSE+NSE)
17,131,583

Shareholding Pattern

(as on 31-Dec)
%
Promoter
34.65
FIIs
22.79
DIIs
22.07
Public & Others
20.49
Source: Ace equity, StockAxis Research

Price performance

Return (%)
1m
3m
12m
Absolute
14.40
36.44
188.71
Sensex
-3.37
8.93
60.54
Source: Ace equity, StockAxis Research

Indexed Stock Performance

Hindalco Industries Ltd Sensex
Hindalco Industries Ltd
Source: Ace equity, StockAxis Research

Investment in downstream assets through organic route to improve earnings profile

Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, is the world’s largest aluminium rolling and recycling company, and a major copper player. It is also one of Asia’s largest producers of primary aluminium. In India, the Company’s aluminium manufacturing units comprise the full value chain-from bauxite mining, alumina refining, coal mining, captive power generation and aluminium smelting to downstream value addition of aluminium rolling, extruding and foil making. Hindalco’s copper facility in India comprises a world-class copper smelter, downstream facilities, a fertilizer plant and a captive jetty. The copper smelter is among the world’s largest custom smelters at a single location. Novelis Inc., Hindalco’s wholly-owned subsidiary is the world’s largest producer of aluminium beverage can stock and the largest recycler of used beverage cans (UBCs). Novelis provides innovative solutions to its customers in the beverage cans, automobile and speciality products segments. It operates an integrated network of technically advanced rolling and recycling facilities across North America, South America, Europe and Asia. In April-20 Novelis had acquired Aleris which has 13 manufacturing plants across North America, Europe and Asia. The acquisition of Aleris provides Novelis further product diversification with the addition of high-end aerospace and expanded speciality capabilities. It insulates Hindalco-Novelis from global price volatility and sharpens focus on the downstream business.

Consolidated Financial Statements

Rs in Cr Net Sales EBITDA EBITDAM PAT EPS ROE P/E EV/EBITDA
FY18 115182.80 13388.93 11.62% 6082.92 27.29 11.09% 7.86 6.57
FY19 130542.00 15224.00 11.66% 5496.00 24.80 9.56% 8.30 5.54
FY20 118144.00 14096.00 11.93% 3767.00 16.99 6.46% 5.64 4.30
FY21E 129958.40 18194.18 14.00% 6115.25 27.55 9.53% 11.98 6.17
FY22E 144903.62 20286.51 14.00% 7663.23 34.52 10.75% 9.56 5.21
FY23E 151424.28 21275.11 14.05% 8465.27 38.13 11.26% 8.65 4.35

Investment Rationale

Investment in downstream products for Indian operation
Hindalco will invest US$1.1bn in Indian operations over the next 5 years from FY2021 to FY2025. More than 3/4th of the investment would be in aluminium business. It includes US$0.2bn on 500kt alumina refinery expansion, scheduled for commissioning in Q4FY21. US$0.65bn of capex is dedicated on doubling of downstream capacity to 600kt and building recycling capacity in Aluminium operations. The company will not expand its upstream capacities (current capacity: 1.3mnt) even beyond FY25 due to high cost of domestic coal and low Return on equity. At present, global demand for aluminium is ~90 MT, while India demand was ~3.7 MT in CY20. By 2030, aluminium consumption is expected to be more than 7.2 MT, a demand growth of 7 percent CAGR. Dominant product segments globally like Flat rolled aluminium products and Extrusions are under-represented in India, which is likely to witness growth going forward. In copper business, company guided capex of US$0.2bn towards, putting up 25kt of inner grove tubes mainly used by AC & refrigeration, heat exchanger and plumbing industry, 100kt of recycling facility and expanding continuous casting roads capacity by 58% to 570kt. It plans to put new copper smelter of 250kt beyond FY25. Refined copper demand is likely to grow by around 7 to 8 percent in the next 8-10 years from FY22E. The government’s push for rail electrification, metro network and high-speed railways is expected to drive significant demand for copper alloy in catenary wire system.

Hindalco Industries

Capex Plans by Novelis
Hindalco plans to invest $990 mn for organic growth capital over next 5 years. Currently, Novelis and Aleris put together have capacity of around 4 MT which will increase to 4.5 MT. In 2019, the global Flat rolled aluminium product market was around 28 million tonnes, and is likely to witness a compounded annual growth rate of around 3 percent through 2025. North America has consistently witnessed higher share of aluminium cans in beverage type packaging from 30 percent in 2014 to 67 percent in 2019 and this trend is likely to be higher going forward. The global demand for aluminium automotive sheet is likely to witness 10 percent CAGR from CY2020-25. After the expansion, aluminium cans will continue to dominate the volume mix of around 54 percent, 21 percent from auto, 22 percent from specialties and 3 percent from aerospace.

Hindalco Industries

Debt Reduction plans
As on 31st December 2020, Hindalco had consolidated gross debt of $9.86 billion with a consolidated debt to EBIDTA of 3.1x. By 31st March 2021, it plans to bring the debt to $9.20 billion. On a consolidated basis, Hindalco plans gross debt reduction of $2.9 billion from June 2020 through CY2022. At Novelis levels, Hindalco plans to reduce gross debt by $2.6 billion (total gross debts at Novelis levels as on 31st December 2020 was $6.5 billion) which include refinancing as well. In FY21, bridge loan amounting to $1.1 billion will be paid, of which $500 million has already been paid and the rest $600 million will be repaid in the March 2021 quarter. This bridge loan pertains to acquisition of Aleris. Novelis has already repaid a short-term loan amounting to $900 million in the September & December 2020 quarters. Out of the $1.7 billion repayment due in FY2022, $1.1 billion will be refinanced and the balance $600 million will be repaid out of cash flows. At India levels, Hindalco plans a debt reduction of $0.3 billion. In FY22, bonds amounting to $810 million are due, of which $540 million will be refinanced and the balance $270 million will be repaid in 2022. As per the management, consolidated net debt to EBIDTA is likely to come down to 2.5x in by FY23 from 3x in FY21.

Capital Allocation Framework
The capital allocation policy provides a clear road map for growth and capital distribution for the next five years. At the consolidated level, Hindalco expects free cash flow generation of US$1-1.2 billion per annum, post its normal working capital and maintenance capex. Free cash flows will be allocated in the following manner:

  • 50 percent growth capex-
  • 30 percent towards debts reduction-
  • 8 to 10 percent towards distribution of dividend to shareholders
  • the balance amount will be transferred to the treasury.

Allocation towards growth capex is likely to be around $2.5 to $3 billion over the next 5 years. Management has ensured that all new investments will fetch return above the cost of capital. The company has no large inorganic growth plans through acquisitions.

Outlook & valuation

The outlook of the management looks positive for the next 5 years, based on the demand situation that is likely to evolve over a period of time. Investment into downstream assets through the organic route will provide Hindalco with a better earnings profile and ensure lower volatility from LME prices. With investments largely in downstream and value-added products, return on investment will be higher along with shorter gestation period. Also, Novelis business outlook is strong driven by recovery in auto demand and cost synergies from Aleris. With some global funds following the ESG mandates, Hindalco remains committed to the ESG policy and has undertaken to become net carbon neutral, zero waste to landfill, water positivity and no net loss on biodiversity by 2050. At the price of 330, Hindalco is trading at EV/EBITDA of 4.35X on the basis of FY23E.

Financial Statement

Profit & Loss statement

Yr End March (Rs Cr) 2018 2019 2020 2021E 2022E 2023E
Net Sales 115182.80 130542.00 118144.00 129958.40 144903.62 151424.28
Growth % 14.97% 13.33% -9.50% 10.00% 11.50% 4.50%
Expenditure
Material Cost 68885.79 78689.00 68271.00 76675.46 85493.13 89340.32
Employee Cost 8644.78 9043.00 8832.00 9876.84 10577.96 10978.26
Other Expenses 24263.30 27586.00 26945.00 25211.93 28546.01 29830.58
EBITDA 13388.93 15224.00 14096.00 18194.18 20286.51 21275.11
Growth % 8.30% 13.71% -7.41% 29.07% 11.50% 4.87%
EBITDA Margin 11.62% 11.66% 11.93% 14.00% 14.00% 14.05%
Depreciation & Amortization 4606.49 4777.00 5091.00 5292.85 5422.08 5631.95
EBIT 8782.44 10447.00 9005.00 12901.33 14864.43 15643.16
EBIT Margin % 7.62% 8.00% 7.62% 9.93% 10.26% 10.33%
Other Income 1636.26 1414.00 1396.00 1458.90 2156.21 2224.57
Interest & Finance Charges 3910.73 3778.00 4197.00 5232.99 5582.99 5232.99
Profit Before Tax - Before Exceptional 6507.97 8083.00 6204.00 9127.24 11437.66 12634.74
Profit Before Tax 8282.13 8083.00 5920.00 9127.24 11437.66 12634.74
Tax Expense 2074.17 2588.00 2157.00 3011.99 3774.43 4169.46
Effective Tax rate 31.87% 32.02% 34.77% 33.00% 33.00% 33.00%
Exceptional Items 1774.16 - -284.00 - - -
Net Profit 6207.96 5495.00 3763.00 6115.25 7663.23 8465.27
Growth % 225.46% -11.48% -31.52% 62.51% 25.31% 10.47%
Net Profit Margin 5.39% 4.21% 3.19% 4.71% 5.29% 5.59%
Consolidated Net Profit 6082.92 5496.00 3767.00 6115.25 7663.23 8465.27
Growth % 220.20% -9.65% -31.46% 62.34% 25.31% 10.47%
Net Profit Margin after MI 5.28% 4.21% 3.19% 4.71% 5.29% 5.59%

Balance Sheet

Yr End March (Rs Cr) 2018 2019 2020 2021E 2022E 2023E
Share Capital 222.89 222.00 222.00 222.00 222.00 222.00
Total Reserves 54612.89 57381.00 58181.00 63929.33 71056.14 78844.19
Shareholders' Funds 54851.77 57501.00 58317.00 64151.33 71278.14 79066.19
Minority Interest 8.64 9.00 10.00 10.00 10.00 10.00
Non Current Liabilities
Long Term Burrowing 47874.26 48032.00 58379.00 73540.00 68540.00 63540.00
Deferred Tax Assets / Liabilities 3053.76 3650.00 3761.00 3456.00 3456.00 3456.00
Long Term Provisions 7081.05 7244.00 8337.00 8337.00 8337.00 8337.00
Current Liabilities
Short Term Borrowings 3398.16 4226.00 8717.00 8717.00 8717.00 8717.00
Trade Payables 20404.80 20723.00 18300.00 20391.98 22591.40 24355.72
Other Current Liabilities 5892.03 5727.00 6413.00 6252.00 6252.00 6252.00
Short Term Provisions 3065.68 3349.00 3787.00 3787.00 3787.00 3787.00
Total Equity & Liabilities 147013.82 151972.00 168618.00 191239.31 195565.53 200117.91
Assets
Net Block 85064.71 85837.00 89173.00 89461.15 89539.08 89907.13
Non Current Investments 6901.55 5180.00 3154.00 3154.00 3154.00 3154.00
Long Term Loans & Advances 1848.96 1255.00 1418.00 1418.00 1418.00 1418.00
Current Assets
Currents Investments 3903.48 3855.00 6279.00 6279.00 6279.00 6279.00
Inventories 21631.39 22194.00 22384.00 22091.31 24097.49 25573.50
Sundry Debtors 9959.81 11389.00 9345.00 10195.99 10919.18 11771.93
Cash and Bank 8057.76 9787.00 21569.00 43343.86 44862.79 46718.35
Short Term Loans and Advances 1672.38 2887.00 1208.00 1208.00 1208.00 1208.00
Total Assets 147013.82 151972.00 168618.00 191239.31 195565.53 200117.91

Cash Flow Statement

Yr End March (Rs Cr) 2018 2019 2020 2021E 2022E 2023E
Profit After Tax 6207.96 5495.00 3763.00 6115.25 7663.23 8465.27
Depreciation 4606.49 4777.00 5091.00 5292.85 5422.08 5631.95
Others 811.95 -9.40 -609.00 - - -
Changes in Working Capital -1271.63 -1683.00 -1178.00 1533.68 -529.95 -564.45
Cash From Operating Activities 10897.68 11977.00 12665.00 12941.78 12555.36 13532.78
Purchase of Fixed Assets -3000.75 -6001.00 -6791.00 -5500.00 -5500.00 -6000.00
Free Cash Flows 7896.93 5976.00 5874.00 7441.78 7055.36 7532.78
Others 7981.44 320.00 -1569.00 - - -
Cash Flow from Investing Activities 5025.75 -5648.00 -8301.00 -5500.00 -5500.00 -6000.00
Increase / (Decrease) in Loan Funds -12283.26 -1414.00 11283.00 15000.00 -5000.00 -5000.00
Equity Dividend Paid -293.76 -323.00 -320.00 -366.91 -536.43 -677.22
Others -3835.38 -3729.00 -4353.00 - - -
Cash from Financing Activities -16412.40 -5466.00 6610.00 14633.09 -5536.43 -5677.22
Net Cash Inflow / Outflow -488.97 863.00 10974.00 22074.86 1518.93 1855.56
Opening Cash & Cash Equivalents 8221.95 8040.00 9095.00 21269.00 43343.86 44862.79
Closing Cash & Cash Equivalent 8040.50 9095.00 21269.00 43343.86 44862.79 46718.35

Key Ratios

Yr End March 2018 2019 2020 2021E 2022E 2023E
Basic EPS 27.29 24.80 16.99 27.55 34.52 38.13
Diluted EPS 27.29 24.80 16.99 27.55 34.52 38.13
Cash EPS (Rs) 47.95 46.36 39.96 51.39 58.94 63.50
DPS 1.20 1.20 1.00 1.65 2.42 3.05
Book value (Rs/share) 246.04 259.47 263.08 288.97 321.07 356.15
ROCE Post Tax 6.74% 7.47% 5.77% 7.08% 7.73% 7.98%
ROE 11.09% 9.56% 6.46% 9.53% 10.75% 11.26%
Inventory Days 63.26 61.27 68.86 65.00 64.00 63.00
Receivable Days 28.89 29.85 32.03 30.00 29.00 29.00
Payable Days 60.00 57.50 60.28 60.00 60.00 60.00
PE (x) 7.86 8.30 5.64 11.98 9.56 8.65
P/BV (x) 0.87 0.79 0.36 1.14 1.03 0.93
EV/EBITDA (x) 6.57 5.54 4.30 6.17 5.21 4.35
Dividend Yield 0.56% 0.58% 1.04% 0.50% 0.73% 0.92%
P/Sales (x) 0.42 0.35 0.18 0.56 0.51 0.48
Debt/EBITA 3.89 3.44 4.77 4.52 3.81 3.40
Sales/Net FA (x) 1.36 1.53 1.35 1.46 1.62 1.69